Working Paper: NBER ID: w23671
Authors: J. Scott Davis; Eric Van Wincoop
Abstract: We document that the correlation between capital inflows and outflows has increased substantially over time in a sample of 128 advanced and developing countries. We provide evidence that this is a result of an increase in financial globalization (stock of external assets and liabilities). This dominates the effect of an increase in trade globalization (exports plus imports), which reduces the correlation between capital inflows and outflows. In the context of a two-country model with 14 shocks we show that the theoretical impact of financial and trade globalization on the correlation between capital inflows and outflows is consistent with the data.
Keywords: capital flows; financial globalization; trade globalization; correlation
JEL Codes: F3; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial globalization (F30) | correlation between capital inflows and outflows (F32) |
| increase in stock of external assets and liabilities (F32) | correlation between capital inflows and outflows (F32) |
| trade globalization (F69) | correlation between capital inflows and outflows (F32) |
| financial globalization (F30) | volatility of gross flows relative to net flows (J60) |
| volatility of gross flows relative to net flows (J60) | correlation between capital inflows and outflows (F32) |