International Reserves and Gross Capital Flows Dynamics
Fondo Latinoamericano de Reservas Discussion Paper No. 3
25 Pages Posted: 2 Aug 2014
Date Written: July 31, 2014
This paper explores the role of international reserves as a stabilizer of international capital flows, in particular during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database - 63 countries, 1991-2010 - using standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves act as a buffer during financial stress. A robust result of the analysis is that international reserves facilitate financial disinvestment overseas by residents - a fall in capital outflows. This partially offsets the drop in foreign capital inflows in such periods, which are only marginally mitigated by reserves under some specifications of the model. For the whole period, we also find that larger stocks of reserves are linked to higher gross inflows and lower gross outflows.
Keywords: gross capital flows, international reserves, systemic crises, capital retrenchment
JEL Classification: F21, F32, F33
Suggested Citation: Suggested Citation