Political and corporate governance and pro-cyclicality in capital flows: Evidence from emerging market countries

According to recent research, external factors are key determinants of capital flows to emerging market countries. They are among the causes of high capital flow volatility that, in turn, leads to high levels of macroeconomic volatility. We postulate that, along with political governance, corporate governance can play an important role in mitigating the effect of external factors and in reducing capital flow volatility. In particular, we show that by implementing better corporate governance, emerging market countries could reduce the sensitivity of capital flows to external shocks and, hence, reduce the volatility of their economies.