International Reserves and Gross Capital Flows Dynamics

What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature

“…Non‐resident flows are generally the more unstable component, especially in the context of sudden stops (Korinek and Mendoza, ; Cavallo et al ., ) . In fact, during periods of stress EM residents tend to dispose of overseas assets if the country's reserve buffers are high, offsetting some of the selling pressure by non‐residents (Alberola et al ., ). As a result, non‐resident flows in general and portfolio flows in particular are of predominant importance from a financial stability perspective.…”

Gross capital flows and their long-term determinants for developing economies : a panel co-integration approach

“…Also, their macroeconomic and microeconomic effects may differ significantly, as has been recently argued and shown by the literature on net flows (Kose et al, 2009;Contessi et al, 2010;Fratzscher, 2011;Byrne and Fiess, 2011;Arias et al, 2013) or gross flows (CIEPR, 2012;Forbes and Warnock, 2012;Obstfeld, 2012;Broner et al, 2013). 2 Besides, as stated before, they do not respond in the same way over the cycle or at the time of financial stress (Rothenberg and Warnock, 2011;Milesi-Ferretti and Tille, 2011;Broner et al, 2013;Calderon and Kubota, 2013;Alberola et al, 2015). As for the econometric approach, the authors are not aware of any paper in the international literature that implements a panel co-integration approach to study long-term determinants of capital flows.…”

“…In turn, Broner et al (2013) illustrate that during crises "there is a retrenchment in both inflows by foreigners and outflows by domestic agents." Following this approach, Alberola et al (2015) study the impact of the accumulation of international reserves on the behavior of gross capital flows in periods of global stress. They find that the higher the stock of reserves, the larger the drop in gross domestic outflows, since residents repatriate capitals in order to mitigate the lack of foreign financing.…”

“…The second one is associated with pull factors such as productivity growth, macroeconomic conditions, and institutional framework of the countries receiving the resources (Chuhan et al, 1996;Papaioannou, 2009;Milesi-Ferretti and Tille, 2010;Bluedorn et al, 2011). However, they can respond to both push and pull factors (Felices and Orskaug, 2008;Fratzscher, 2011;Arias et al, 2013;Alberola et al, 2015). Moreover, they can also be determined by commercial flows (Valdes-Prieto and Soto, 1998;Milesi-Ferretti and Tille, 2010) and information asymmetry, which affects the behavior of capital flows, among others, because foreign investors usually alter their decisions on account of "herd behavior" and "home bias" (Cont and Bouchaud, 2000;Bikhchandani and Sharma, 2001;Dvořák, 2003).…”

Did foreign exchange holding influence growth performance during the global financial crisis?

“…Indeed, at very high levels of reserves holding, the moderating impact on output collapse seems disappear. Alberola, Erceb, and Serena () find that large stocks of foreign reserves pay off to mitigate gross capital outflows during periods of systemic financial stress, but, when introducing non‐linear effects through quadratic terms, they show that reserves holding exhibits decreasing returns. In other words, growing reserves accumulation is less and less effective to reduce capital outflows.…”