Capital Flow Waves: Surges, Stops, Flight, and Retrenchment

60 Pages Posted: 29 Aug 2011 Last revised: 6 Feb 2021

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

Date Written: August 2011

Abstract

This paper analyzes waves in international capital flows. We develop a new methodology for identifying episodes of extreme capital flow movements using data that differentiates activity by foreigners and domestics. We identify episodes of "surges" and "stops" (sharp increases and decreases, respectively, of gross inflows) and "flight" and "retrenchment" (sharp increases and decreases, respectively, of gross outflows). Our approach yields fundamentally different results than the previous literature that used measures of net flows. Global factors, especially global risk, are significantly associated with extreme capital flow episodes. Contagion, whether through trade, banking, or geography, is also associated with stop and retrenchment episodes. Domestic macroeconomic characteristics are generally less important, and we find little association between capital controls and the probability of having surges or stops driven by foreign capital flows. The results provide insights for different theoretical approaches explaining crises and capital flow volatility.

Suggested Citation

Forbes, Kristin J. and Warnock, Francis E., Capital Flow Waves: Surges, Stops, Flight, and Retrenchment (August 2011). NBER Working Paper No. w17351, Available at SSRN: https://ssrn.com/abstract=1918680

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Francis E. Warnock

University of Virginia - Darden Business School ( email )

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HOME PAGE: http://faculty.darden.virginia.edu/warnockf/index.htm

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