Gross Capital Flows by Banks, Corporates and Sovereigns

Stefan Avdjiev, Bryan Hardy, Sebnem Kalemli-Ozcan, Luis Servén

NBER Working Paper No. 23116
Issued in January 2017, Revised in October 2017
NBER Program(s):International Finance and Macroeconomics

We construct a quarterly dataset that decomposes gross capital inflows and outflows by lender and borrower sector—banks, corporates, and sovereigns—of the domestic economy for a large set of countries since the mid 1990s. Using this dataset, we establish four new facts. First, the well-known positive correlation between capital inflows and outflows is driven by banking flows, mainly by borrowing and lending of global banks in advanced countries. Second, during domestic economic downturns (booms), inflows to domestic banks and corporates decline (increase) in all countries and banks in advanced countries invest less (more) abroad, decreasing (increasing) their outflows, while banks and corporates in emerging markets do not change their outflows. Third, private and public inflows respond in opposite directions to domestic business cycles—a fact driven by emerging markets’ sovereigns. During a downturn (boom), inflows to private sector decline (increase) but the sovereigns behave in a countercyclical manner by borrowing more (less) from abroad. Fourth, in response to adverse (positive) global credit supply shocks, such as an increase (decrease) in the VIX, inflows to domestic banks and corporates decline (increase), while domestic banks and corporates invest less (more) abroad, decreasing (increasing) their outflows. Sovereigns do not respond to such supply shocks on average. These four facts are inconsistent with the standard models in which all foreign and domestic agents invest or disinvest in the same countries as a response to domestic and global shocks.

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Document Object Identifier (DOI): 10.3386/w23116

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