Portfolio Capital Flows: Hot or Cold?

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Abstract
A distinction is often made between short-term and long-term capital flows: the former are deemed unstable hot money and the latter are deemed stable cold money. Using time-series analysis of balance of payments data for five industrial and five developing countries, we find that in most cases the labels “short-term” and “long-term” do not provide any information about the time-series properties of the flow. In particular, long-term flows are often as volatile as short-term flows, and the time it takes for an unexpected shock to a flow to die out is similar across flows. long-term flows are also at least as unpredictable as short-term flows, and knowledge of the type of flow does not improve the ability to forecast the aggregate capital account.

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