Working Paper: CEPR ID: DP8496
Authors: Marcel Fratzscher
Abstract: The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks--key crisis events as well as changes to global liquidity and risk--have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors ('push' factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants ('pull' factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets.
Keywords: advanced economies; capital flows; common shocks; emerging markets; factor model; liquidity; pull factors; push factors; risk
JEL Codes: F21; F3; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common global shocks (F69) | capital flows (F32) |
| key crisis events (H12) | capital flows (F32) |
| changes in liquidity and risk (G21) | capital flows (F32) |
| collapse of Lehman Brothers (F65) | capital flows (F32) |
| liquidity conditions (E41) | capital flows (F32) |
| institutional quality (L15) | capital flows (F32) |
| macroeconomic fundamentals (E66) | capital flows (F32) |
| stronger institutions (O17) | less severe capital outflows (F32) |
| weaker conditions (C62) | greater volatility in capital flows (F32) |