International Capital Flows : Do Short-Term Investment and Direct Investment Differ ?

The authors examine the behavior of four major components of international capital flows in 15 developing and industrial countries. Striking differences in the behavior of the component flows arise in general specifications that allow the flows to interact. For example, the behavior of international short-term investment appears to be sensitive to changes in all the other types of international capital flows, including direct investment, but direct investment appears to be insensitive to such changes. In finding that short-term investment appears to respond more dramatically to disturbances in other capital flows and in other countries than does direct investment, the authors provide empirical support for the conventional notion that short-term investment is"hot money"and direct investment is not.