Capital Flows to Emerging Markets: Disentangling Quantities from Prices

We study the joint dynamics in the volume and prices of capital fows to emerging market economies (EMEs). A dynamic factor model augmented with sign and zero restrictions allows us to identify demand/supply shocks of idiosyncratic/common nature. While common credit supply shocks are the main driver of prices, idiosyncratic credit demand and supply shocks account for most of the variation in quantities. A structural multicountry SOE/RBC model is calibrated to EMEs data to further shed light on the main transmission channels. Augmented with correlated productivity and interest rate shocks, the model matches the comovement between prices and quantities as well as business cycle moments. Common credit demand drivers, captured as correlated TFP shocks, account for around half of the observed comovement in quantities but they are not a signicant driver of price comovement. Fundamentals matter signicantly more for capital flows than for country spreads, which are driven by a sizeable global financial cycle.