An alternative Post Keynesian framework for understanding capital flows to emerging markets.

This paper represents a contribution to the establishment of a framework for the analysis of international capital flows, with a specific focus on emerging markets. It is based on a “monetary” analysis of the economy, and the works of Hyman Minsky and Jan Toporowski in particular. The key aspects of such an approach are, firstly, that in a monetary economy capital flows need to be understood as “flows of funds” and pertaining to the realm of financial choices, as opposed to the traditional understanding of capital flows based on “real” variables, such as saving and investment. A consequence of this is the need to focus on gross rather than capital flows. Secondly, liquidity preference considerations also apply at the international level, particularly in relation to the liquidity of emerging markets’ currencies, which in turn depends on context-specific “Keynsian fundamentals”. Thirdly, the rise of institutional investors is the key historical development in the financial system, shaping the current reality of cross-border capital flows, including to emerging markets. It is argued that their liabilities, in light of the theories of Minsky and Toporowski, are one of the most important variables in determining their portfolio choice. This paper synthesises these elements by understanding capital flows to emerging markets as the demand for emerging markets’ assets by institutional investors. A framework categorising the various channels guiding such a demand is proposed.