NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Flow Waves: Surges, Stops, Flight, and Retrenchment

Kristin J. Forbes, Francis E. Warnock

NBER Working Paper No. 17351
Issued in August 2011
NBER Program(s):   CF   IFM   ITI

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.

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This paper was revised on February 24, 2012

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Document Object Identifier (DOI): 10.3386/w17351

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