International Reserves and Gross Capital Flows Dynamics

Fondo Latinoamericano de Reservas Discussion Paper No. 3

25 Pages Posted: 2 Aug 2014

See all articles by Enrique Alberola

Enrique Alberola

Bank for International Settlements (BIS)

Aitor Erce

UPNA

José María Serena

Bank for International Settlements (BIS)

Date Written: July 31, 2014

Abstract

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

Alberola, Enrique and Erce, Aitor and Serena, Jose Maria, International Reserves and Gross Capital Flows Dynamics (July 31, 2014). Fondo Latinoamericano de Reservas Discussion Paper No. 3, Available at SSRN: https://ssrn.com/abstract=2474609 or http://dx.doi.org/10.2139/ssrn.2474609

Enrique Alberola (Contact Author)

Bank for International Settlements (BIS) ( email )

Ruben Dario 281
Polanco, Miguel Hidalgo
Mexico City, 11580
Mexico

HOME PAGE: http://www.bis.org/author/enrique_alberola-ila.htm

Aitor Erce

UPNA ( email )

Pamplona
Spain

Jose Maria Serena

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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