Gross Capital Flows by Banks, Corporates, and Sovereigns

Abstract

We construct a new quarterly data set of international capital flows broken down by sector - banks, corporates and sovereigns - and demonstrate the importance of distinguishing capital flows by the sector of domestic borrowers and lenders. We document four new sets of facts. First, banks account for the largest part of the external debt (stocks and flows) in advanced economies, whereas in emerging markets, banks, corporates and sovereigns have roughly equal shares. Second, the high correlation between total capital inflows and outflows documented in the literature is driven by banking sector flows; that is, domestic banks’ borrowing from foreigners is highly correlated with domestic banks’ lending to foreigners. Third, sovereign flows behave very differently from and often act as a countervailing force to private sector (banking and corporate) flows, especially in emerging markets. Fourth, different shocks (global financial cycles vs. domestic business cycles; banking vs. currency vs. sovereign crises) generate very distinct patterns of capital inflows and outflows by sector. The stylized facts we document deepen our understanding of the dynamics and behavior of capital flows, and have important implications for open economy models.

How ETFs Amplify the Global Financial Cycle in Emerging Markets

“…Recent work has extensively documented how shocks to U.S. financial conditions are transmitted to other countries in a so-called global financial cycle (Rey, 2015). While much of this research has focused on bank flows (Bruno and Shin, 2015b,a), changes in U.S. monetary policy and risk appetite are also transmitted via portfolio flows (Forbes and Warnock, 2012;Fratzscher, 2012;Avdjiev et al, 2017). At the same time, it is clear that exposure to the global financial cycle varies across countries (Cerutti et al, 2015;Choi et al, 2017) and over time (Ahmed and Zlate, 2014).…”

Interest Rate Normalization in a World with High Indebtedness

“…A novel dataset from Avdijev et al ( 2022 ) showed that liability flows were historically high and persistent for the past decade. Again, this is an indication of increased vulnerability in countries that have been receiving these liability flows.…”

“…Therefore, it is also important to look at liability flows only, i.e., foreigners’ acquisitions and sales of domestic assets. Avdijev et al ( 2022 ) constructed a quarterly dataset splitting flows into liability and asset flows. In Fig.…”

“…Notes: PD = Portfolio Debt, OID = Other Investment Debt, Public = General Government + Central Bank, Bank = Depository Corporations, except the central bank, Corp = Other Sectors. Source: Dataset from Avdijev et al ( 2022 ) …”

The rise in foreign currency bonds: The role of US monetary policy and capital controls

“…This paper sheds light on these issues by using firm-level data on corporate bond issuances for EME companies and analyzing the determinants of foreign currency borrowing. The results show that companies are more likely to issue in foreign currency with more expansionary US 1 E.g., see Gozzi et al (2015), Ayala et al (2017), CGFS (2021), and Avdjiev et al (2022) for descriptions. The issuance of new debt (our focus) is dominated by bonds, while the stock remains dominated by loans.…”