Working Paper: NBER ID: w17351
Authors: Kristin J. Forbes; Francis E. Warnock
Abstract: This paper analyzes waves in international capital flows. We develop a new methodology for identifying episodes of extreme capital flow movements using data that differentiates activity by foreigners and domestics. We identify episodes of "surges" and "stops" (sharp increases and decreases, respectively, of gross inflows) and "flight" and "retrenchment" (sharp increases and decreases, respectively, of gross outflows). Our approach yields fundamentally different results than the previous literature that used measures of net flows. Global factors, especially global risk, are significantly associated with extreme capital flow episodes. Contagion, whether through trade, banking, or geography, is also associated with stop and retrenchment episodes. Domestic macroeconomic characteristics are generally less important, and we find little association between capital controls and the probability of having surges or stops driven by foreign capital flows. The results provide insights for different theoretical approaches explaining crises and capital flow volatility.
Keywords: capital flows; global risk; contagion; economic policy
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global risk (F65) | stops (Y60) |
| global risk (F65) | retrenchments (J63) |
| global risk (F65) | surges (E32) |
| global risk (F65) | flight (L93) |
| contagion effects (E44) | stops (Y60) |
| contagion effects (E44) | retrenchments (J63) |
| capital controls (F38) | surges (E32) |
| capital controls (F38) | stops (Y60) |