The great moderation in international capital flows: A global phenomenon?

Abstract

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How important are global factors for understanding the dynamics of international capital flows?

“…4 This choice of variables closely resembles the typical set of macroeconomic and financial quantities included in the literature on global macroeconometric modeling (see, for instance, Crespo Cuaresma et al, 2016; Feldkircher and Huber, 2016) augmented with a set of additional explanatory variables that were previously identified to be important determinants of capital flows (e.g. Broto et al, 2011;Milesi-Ferretti and Tille, 2011;IMF, 2014;Mishra et al, 2014;Olaberría, 2015;McQuade and Schmitz, 2017). As opposed to the literature on modeling capital flows by means of gravity equations (e.g.…”

“…World financial inflows have since risen to less than half of their pre-crisis levels. The composition of global inflows has changed substantially both in terms of flow type and geography (see also Bussière et al, 2018;McQuade and Schmitz, 2017). Bank flows, that used to account for the largest share of the total before the GFC, declined substantially, mainly reflecting deleveraging of large global banks as well as restraining cross-border operations in response to regulatory reform, while FDI flows that in the pre-crisis period were slightly lower than bank flows have fallen much less than bank flows.…”

Sectoral Capital Flows: Covariates, Co-movements, and Controls

“…Considering capital flows along sectoral lines reveals sectoral specificities behind observed patterns in capital flows as different sectors may be undertaking different cross-border financial transactions and react differently to shocks. For instance, there is evidence that banking sector flows largely explain the surge and sudden stop before and during the global financial crisis (GFC) of 2008-09 (Milesi-Ferretti and, as well as the moderate levels of gross flows post- GFC (McCauley et al, 2019;McQuade and Schmitz, 2017) and drive co-movements in debt flows (Avdjiev et al, 2018). In addition, the past decades have seen structural changes in the actors engaged in financial systems: in many countries, the relative importance of non-bank financial institutions has dramatically increased with traditional deposit taking institutions playing a lesser role in financial intermediation (Patalano and Roulet, 2020).…”

Cross-Border Currency Exposures

“…Thus, countries with lower net liability positions in domestic currency before the crisis experienced larger increases in these positions. This development seems to have been dominated by an adjustment in equity liabilities in domestic currency, in line with relatively robust FDI inflows to emerging economies in the post-crisis period (McQuade and Schmitz, 2017).…”

“…More recently, Lane and Milesi-Ferretti (2018) highlight that the growth in international financial integration came to a halt in the aftermath of the global financial crisis. This trend is mainly attributed to the decline in cross-border activity by banks in advanced economies (McQuade and Schmitz, 2017). While the IF I measure focuses on the size of the international balance sheet and its decomposition into financial instruments, little is known about the currency composition of the stocks of external assets and liabilities.…”