Capital-Flow Volatility and Economic Openness: A Wavelet Approach

Abstract

The paper analyzes the interaction between capital-flow volatility and trade openness in five developed economies and four emerging markets by applying wavelet analysis over the period from 1990Q1 to 2017Q1. The main findings reveal that, in the medium term, capital-flow volatility drives trade openness in emerging markets and developing economies. Special attention should be paid to developed countries during the 2008 economic crisis, when trade exposure is shown to have had significant effects on capital-flow volatility. In the long term, the direction of comovement is rather idiosyncratic in our set of emerging markets and developing countries. Moreover, in both groups of countries, the intensity and persistence of relationships are very sensitive to the volatility of real GDP and secondary to geopolitical risk and oil-price volatility.