The Determinants and Dynamics of Global Capital Flows

Dear Colleagues,

The marked increase in capital flows leading up to the 2007-08 global financial crisis, were driven by a variety of factors attributed, at times, to the global savings glut, low interest rates following the 2001 recession in the U.S., increasing stability in emerging market countries, among others. During and following the crisis, the driving forces behind the movement of capital flows have been much less clear. The sovereign debt crisis that plagued the EU area, combined with the implementation of quantitative easing in the U.S., U.K., and Japan, provided “push” factors; however, the relative stability and growth of emerging market countries were also contributing factors.

The literature on the factors affecting global capital flows is at least 30 years old now, beginning with the widespread liberalization of emerging market capital accounts in the 1990s and the institution of more effective and stable monetary and currency policies. However, although the increase in global capital flows has provided increased financial and real economic development opportunities across a range of countries, it has brought with it substantial risks. The 1997-98 Asian crisis revealed the extreme risks of more openness, and the banking and currency crises in the early 2000’s, combined with the deep housing and banking crises affecting advanced economies in 2008, has since given impetus for a renewed interest in capital controls or in slowing the implementation of open capital accounts and freely floating currency. Since the Asian crisis, many emerging market countries have responded by adopting strong reserve account policies, and other prudential policies, to reduce their dependence on international financial flows and the attendant risks.

In this collection of papers, we focus on two features of international capital flows. The first is the relationship between global capital flow dynamics and common global shocks on the one hand and regional shocks on the other. Have the “push” factors changed during or following the crisis? To what extent are emerging markets more insulated from shocks originating in advanced countries or alternatively, to what extent are they more exposed?

Second, we consider the extent to which the dynamics and domestic economy impacts of different types of capital flows have changed since the financial crisis. For instance, historically, foreign direct investment was viewed as the most stable and beneficial inflow for economic development. More recently, the rise of global banking has renewed attention on the impact of foreign debt flows and the role of cross-border banking in economic and financial development.

Johanna L Francis
Guest Editor

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• statistical properties of capital flows
• global shocks
• co-movement
• international capital flows
• cross-border banking
• FDI
• portfolio flows
• debt flows