Capital Flow Waves: Surges, Stops, Flight, and Retrenchment
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.
We thank for helpful comments and conversations Alain Chaboud, Marcos Chamon, Bernard Dumas, José de Gregorio, Charles Engel, Jeffrey Frankel, Marcel Fratzscher, Pierre-Olivier Gourinchas, Philip Lane, Patrick McGuire, Gian Maria Milesi-Ferretti, Bent Sorenson, Charles Thomas, and participants at the meetings of the NBER/Sloan Global Financial Crisis project and AEA annual conference and in seminars at Bangko Sentral ng Pilipinas, Bank of England, BIS Asia, European Central Bank, Federal Reserve Bank of San Francisco, INSEAD, Johns Hopkins, MIT, Monetary Authority of Singapore, Reserve Bank of Australia, Reserve Bank of New Zealand, Trinity College Dublin, UC Berkeley, and UVA-Darden. Vahid Gholampour provided research assistance. Warnock thanks the Darden School Foundation, Asian Institute of Management, and the BIS Asia office for generous support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251. citation courtesy of
Capital Flow Waves: Surges, Stops, Flight, and Retrenchment, Kristin J. Forbes, Francis E. Warnock. in Global Financial Crisis, Engel, Forbes, and Frankel. 2012