This paper examines the major determinants of net capital inflows. To account for meaningful differences in responses, 47 countries used for the empirical analysis are divided into advanced economies (AEs) and emerging market economies (EMEs). These countries are further divided into subgroups to consider the heterogeneous determinants for AEs and EMEs. Our empirical examination reveals notable heterogeneity across country groups. Both push and pull factors are statistically significant in AEs, but push factors play a larger role for EMEs, though pull factor influence is observed in a few EME subgroups. Our empirical findings are robust to alternative model specifications, alternative measures of capital flows and interest rates, as well as the use of an alternative sample period.

We investigate the effect of exchange rate flexibility on economic growth. We find that exchange rate flexibility negatively affects economic growth, but this effect varies with the degree of financial market openness. Countries with high financial market openness benefit from maintaining high exchange rate flexibility, whereas the opposite is true for countries with low financial market openness. This empirical result implies that policymakers should consider the long-term growth effect when formulating exchange rate policy as it could be a useful policy option for emerging markets with limited policy independence. This is particularly relevant to policy coordination since greater exchange rate flexibility alone cannot solve the global imbalance.