Dissecting Capital flow Dynamics: A Comprehensive Study of Global Drivers of capital Inflows, Outflows, Net Flows, and Gross Flows

Abstract

This study investigates the specific financial and macroeconomic factors after global financial crises driving inflow, outflow, gross and net capital flows in developing countries, focusing on the relationship with equity, debt, financial, trade, prices and bank flows. In developing countries, capital flow allocation remains a challenge, with financial development emerging as a crucial determinant for directing capital inflows by fostering economic growth. Utilizing a panel regression model and Dumitrescu Hurlin causality test, the study analyzes data from 1995 to 2023. The empirical findings reveal that equity and debt flows exhibit a positive and substantial influence on capital inflows, outflows and gross flows. Conversely, bank flow, prices flow, debt and trade flows demonstrate inverse relationships with capital flows, highlighting the complexities of financial intermediation and inflationary pressures. The Summary results of Dumitrescu Hurlin causality test show that bi directional causality runs from capital inflow to debt flow and bank flow; from capital outflow to debt flow, bank flow, and trade flow; from net flow to equity and debt flow; and from Gross flow to debt flow and prices flow. Some policy lessons emerge like encouragement of equity and debt market development, banking sector reforms, inflation management and promotion of trade policies.