Working Paper: CEPR ID: DP9493
Authors: Philip R. Lane
Abstract: We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area.
Keywords: capital flows; euro; imbalances
JEL Codes: E42; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in gross capital flows (F32) | higher net capital inflows (F21) |
| higher net capital inflows (F21) | financial vulnerabilities (F65) |
| reversal in net capital flows during the crisis (F32) | severe recessions (F44) |
| reversal in net capital flows during the crisis (F32) | declines in domestic asset prices (F65) |
| banking practices (G21) | stability of capital flows (F32) |