Are all types of capital flows driven by the same factors? Evidence from Mexico

Mexico has experienced significant increases in net capital flows in the last decade. These flows have important effects on the real economy, which suggests their relevance for economic policy making. This article aims to estimate the impact and persistence of global (push) and country-specific (pull) shocks on capital flows to Mexico for the period 1995-2015. To investigate the effects of those factors on capital flows, we estimate vector autoregressive models (VAR) and their associated impulse-response functions (IRF). We analyse the determinants of each component of the financial account of the balance of payments at the highest degree of disaggregation, including investment by foreign and domestic investors in public and private sector securities. In general, we find that push factors seem to play an important role in explaining the variations in capital flows. In particular, shocks to the global risk and the Federal Funds rate have statistically significant effects on a larger number of items for portfolio investment (PI) and other investments (OI) than other shocks. The shock to the Federal Funds rate generates persistent effects in some financial account’s items. In addition, a global liquidity shock positively impacts the investment decisions of foreign investors in PI. On the other hand, the global risk, the U.S. GDP, and the exchange rate seem to be relevant factors for the case of the domestic investors in PI. Finally, shocks to domestic GDP and the domestic interest rate have effects only on some items of PI and OI. Interest rates have important effects on investments in public sector securities.