Hot money in bank credit flows to emerging markets during the banking globalization era Ana-Maria Fuertes, Kate Phylaktis *, Cheng Yan Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ4, UK A R T I C L E I N FO Article history: Available online 31 October 2014 JEL classification: E44 F20 F34 G1 Keywords: International capital flows Hot money Crisis transmission Banking globalisation Kalman filter A B ST R AC T This paper investigates the relative importance of hot money in bank credit and portfolio flows from the US to 18 emerging markets over the period 1988–2012. We deploy state-space models à la Kalman filter to identify the unobserved hot money as the temporary com- ponent of each type of flow. The analysis reveals that the importance of hot money relative to the permanent component in bank credit flows has significantly increased during the 2000s relative to the 1990s. This finding is robust to controlling for the influence of push and pull factors in the two unobserved components. The evidence supports indirectly the view that global banks have played an im- portant role in the transmission of the global financial crisis to emerging markets, and endorses the use of regulations to manage international capital flows. © 2014 Elsevier Ltd. All rights reserved. “When one region of the world economy experiences a financial crisis, the world-wide availability of investment opportunities declines. As global investors search for new destinations for their capital, other regions will experience inflows of hot money. However, large capital inflows make the recip- ient countries more vulnerable to future adverse shocks, creating the risk of serial financial crises.” (Korinek, 2011) * Corresponding author. E-mail addresses: A.Fuertes@city.ac.uk (A.-M. Fuertes), k.phylaktis@city.ac.uk (K. Phylaktis), Cheng.Yan.1@cass.city.uk (C. Yan). http://dx.doi.org/10.1016/j.jimonfin.2014.10.002 0261-5606/© 2014 Elsevier Ltd. All rights reserved. Journal of International Money and Finance 60 (2016) 29–52 Contents lists available at ScienceDirect Journal of International Money and Finance journal homepage: www.elsevier.com/locate/jimf