Forecasting capital flows to emerging markets: A Kalman filtering approach

This article provides capital flow forecasts to 32 developing countries using an unobserved components model and maximum likelihood Kalman filtering estimation. Permanent and temporary components of capital flows of bond, equity and syndicated loans are separated out to the countries concerned. Based on these models, and using monthly data up to December 2000, forecasts of various capital flows are presented for the period January 2001 to December 2003. The results of the time series based forecasts are then compared to those obtained using a fundamentals-based approach.