Working Paper: CEPR ID: DP12933
Authors: Cedric Tille; Signe Krogstrup
Abstract: The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. Analysis of data on European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.
Keywords: currency mismatch; capital flows; push factors; spillovers; cross-border transmission of shocks; European bank balance sheets
JEL Codes: F32; F34; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global risk factors (F65) | foreign currency funding flows (F31) |
| existing currency exposure (F31) | foreign currency funding flows (F31) |
| global risk factors + existing currency exposure (F31) | foreign currency funding flows (F31) |
| net short position in foreign currency (F31) | capital outflow (F21) |
| net long position in foreign currency (F31) | capital inflow (F21) |
| global risk factors + net short position (G40) | capital outflow (F21) |
| global risk factors + net long position (G40) | capital inflow (F21) |
| local institutional factors + hedging practices (G21) | foreign currency funding flows (F31) |