The great retrenchment: international capital flows during the global financial crisis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first across time, being especially dramatic in the wake of the Lehman Brothers' failure, second across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception, and third across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature-with countries relying on bank flows being the hardest hit-as well as domestic macroeconomic conditions and their connection to world trade flows. Terms of use: Documents in© The Authors. All rights reserved. No part of this paper may be reproduced without the permission of the authors. AbstractThe current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first across time, being especially dramatic in the wake of the Lehman Brothers' failure, second across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception, and third across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature-with countries relying on bank flows being the hardest hit-as well as domestic macroeconomic conditions and their connection to world trade flows.

The Geographical Composition of National External Balance Sheets: 1980-2005

“…Hence, we would expect countries whose external assets are dominated by short-term debt instruments to suffer more losses following a shock than countries whose external assets are composed mostly of FDI. This is confirmed in the study of Milesi-Ferretti and Tille (2010), which finds that the retrenchment in international capital flows that occurred during the current financial crisis was more pronounced in countries with large net external liabilities in the form of debt. While we do not explore this issue, our data set can be used to study the role of different asset classes in the transmission of shocks.…”

Determinants of global spillovers from US monetary policy

“…Furthermore, I find that in line with existing literature the magnitude of spillovers depends on a number of country characteristics including financial integration, trade openness, the exchange rate regime, industry structure, financial market development and labour market rigidities (Rey and Martin, 2006;Cavallo and Frankel, 2008;Calvo et al, 2008;Edwards, 2004Edwards, , 2007bMilesi-Ferretti and Tille, 2011;Broda, 2001;Edwards and Levy Yeyati, 2005). For example, economies which are more integrated in global capital markets and less in trade, which feature more rigid labor and less developed domestic financial markets, and which have a high share of output accounted for by manufacturing industries experience larger spillovers.…”

“…For example, evidence suggests that in particular nonadvanced economies which are more financially integrated and/or which are more financially open de jure are more likely to experience sudden stops and current account reversals (see Rey and Martin, 2006;Edwards, 2007a;Calvo et al, 2008;Milesi-Ferretti and Tille, 2011); also, the adverse consequences once the latter occur are more severe in financially integrated and open economies (see Edwards, 2004Edwards, , 2007b. 12 Moreover, spillovers in interest rates may be more pronounced the more strongly an economy is integrated in global financial markets.…”

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

“…First, construct a proxy for monthly net private capital inflows, P t , by subtracting 2 Closely related to a sudden stop is a current account reversal. See Milesi-Ferretti and Razin (2000), Chinn and Prasad (2003), Edwards (2005), Freund (2005), Adalet and Eichengreen (2007), and Freund and Warnock (2007). 3 Additional papers on bonanzas or surges include Aizenman and Jinjarak (2009), Cardarelli, Elekdag, and Kose (2009), and Caballero (2010.…”