The relationships among capital flow surges, reversals and sudden stops

Abstract

We contribute to the growing literature on the behavior of capital flow surges and their relationships with sudden stops and capital flow reversals. We suggest a definition of true sudden stops based on gross foreign flows that is a subset of net capital flow reversals. We find that a majority of surges end in reversals of some type and this percentage is only slightly over half for surges in net capital flows and about 70 percent in the case of gross capital flows. Neither a majority of sudden stops nor capital flow reversals are preceded by surges.

An Evaluation of the Impact of Monetary Easing Policies in Times of a Pandemic

“…During sudden stops, it is essential for the emerging countries having high budget deficits and high inflation rate to tighten fiscal and monetary policies. According to Efremidze et al ( 13 ), sudden stops have a negative impact on financial deficits and require governments to take painful steps to reduce the effect on financial markets. Paradoxically, exchange rate policy, tightening of monetary, and fiscal policies as a response to the stops have been found to be effective at a national level, but at the global level, the reversal of international capital flows enhances the effect of external stops.…”

Asian Economic Integration Report 2022:

“…Second, large nonresident capital inflows and outflows could lead to deteriorating macroeconomic and financial conditions, and hence, can amplify risks and vulnerabilities. Moreover, earlier studies note that capital flow episodes transition from one to another, such as "surges" that are followed by "stops" (Efremidze et al 2017;Mercado 2018a andand Sula 2010). Consequently, identifying these episodes is vital in deciding whether and when to use policy measures to help address these episodes of volatile capital flows (The SEACEN Centre 2019).…”

Detecting capital flow surges in developing countries

“…They find that detected surge periods range from 73 to 208 based on different measures. In addition, Efremidze, Kim, Sula, and Willett (2017) also compares different types of surge measures put forward in the literature and draws attention to the resulting differences based on the arbitrary choice of thresholds in identifying surge periods.…”

“…Overall, the existing measures including our measure do not seem to yield comparable results. As there is no theoretical approach suggesting how to best measure the surge periods, it might be reasonable to detect the surge periods by constructing an ensemble or a composite measure as suggested by Efremidze et al (2017). To this end, we look at the share of countries for which the majority of all four measures identify the surge quarters over the common sample period and depict the results in Figure 4.…”