This chapter examines the drivers of exceptionally large net capital flows—surges—to emerging market economies. Most surges to emerging markets are driven by foreign investors rather than by retrenchment of domestic residents liquidating their investments abroad. Moreover, while both domestic and foreign investors respond to global and local factors, foreign investors tend to be more sensitive to global conditions, making them more flighty when conditions turn. The result is that the occurrence of surges—being at least partly determined by global factors—is not under the control of emerging markets, and most of those factors that make individual destinations attractive to foreign capital, such as good growth prospects and strong institutions, are hardly characteristics that the country would want to forgo purely for the sake of avoiding inflow surges. This puts a premium on identifying any negative repercussions of inflow surges and finding policy tools for managing them.
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