Abstract
This chapter documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. Specifically, we compare the period since 2012 with the pre-crisis period and highlight three key stylized facts. First, the “Great Retrenchment” that took place during the crisis has proved very persistent, and world financial flows are now down to half their pre-crisis levels. Second, this fall can be related predominantly to advanced economies, especially those in Western Europe, while emerging markets, except Eastern European countries, have been less severely affected until recently. Third, not all types of flows have shown the same degree of resilience, resulting in a profound change in the composition of international financial flows: while banking flows, which used to account for the largest share of the total before 2008, have collapsed, foreign direct investment flows have been barely affected and now represent about half of global flows. Portfolio flows stand between these two extremes, and within them equity flows have proved more robust than debt flows. This should help to strengthen resilience and deliver genuine cross-border risk-sharing. Having highlighted these stylized facts, this chapter turns to possible explanations for and likely implications of these changes, regarding international financial stability issues.
The views expressed in this document are those of the authors and do not necessarily reflect those of the Banque de France or the Eurosystem. We are very grateful to Valérie Ghiringhelli, Muriel Metais and Valérie Vogel for outstanding research assistance, and to Jonas Heipertz for additional help. We would like to thank Olivier Blanchard, John Bluedorn, Claudia Buch, Bruno Cabrillac, Menzie Chinn, Aitor Erce, Ludovic Gauvin, Jean-Baptiste Gossé, Pierre-Olivier Gourinchas, Galina Hale, Romain Lafarguette, Arnaud Mehl, Gian Maria Milesi-Ferretti, François Mouriaux, Damien Puy, Julio Ramos-Tallada, Romain Rancière, Cédric Tille, Miklos Vari and Frank Warnock for helpful comments and discussions.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
These countries are: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom and the United States. The aggregate flows reported in Sects. 2 and 3 below are based on individual Euro area countries, thus taking into account intra-Euro area flows.
- 2.
We define the pre-crisis period as 2005Q1–2007Q2 (2005 is the first year of the IMF BPM6 database). Taking this period as benchmark should not be interpreted in a normative way, especially given that this period was likely characterized by exceptional buoyancy of capital flows.
- 3.
International trade flows appear very weak compared to pre-crisis levels, which in itself is not very surprising given that economic activity is also less robust. More strikingly, global trade, which used to increase at twice the pace of global GDP, is now growing at roughly the same pace, suggesting that the relation between trade and GDP has changed, owing to a combination of cyclical and structural factors, as outlined in Hoekman (2015).
- 4.
We consider here gross outflows (i.e. net purchases of foreign assets by domestic residents), and gross inflows (i.e. net purchases of domestic assets by foreign residents). As a result, gross flows may become negative. For instance, if foreign residents sell domestic assets massively, this will result in negative gross inflows.
- 5.
Conventional wisdom states that FDI flows represent a more stable source of external financing compared to portfolio and bank flows (in addition to other benefits, including the technology transfers they may entail); see e.g. Levchenko and Mauro (2007) or Albuquerque (2003). However, the extent to which they are indeed more stable is debated; see, for instance, Brukoff and Rother (2007), Bluedorn et al. (2013) and the references cited therein. The relative stability of different types of capital flows has crucial implications for capital account openness and in particular its sequencing (see e.g. Kaminsky and Schmukler 2003, or Bussière and Fratzscher 2008).
- 6.
These papers take mostly an empirical approach; see Tille and Van Wincoop (2010) for a theoretical view.
- 7.
- 8.
In this section and in the rest of the paper (except where otherwise indicated), we use quarterly data from the IMF BoP Statistics, which start in 2005.
- 9.
The difference partly reflects the fact that several advanced economies, like the UK and Luxembourg, are financial hubs, such that flows to and from these centers are hard to attribute to specific countries. In addition, advanced economies comprise the Euro area where cross-border financial integration is particularly high.
- 10.
In this section we focus on international capital outflows. In principle, the data should match the data series for inflows at the world level. However, due to statistical errors and since our database does not include all countries in the world, global outflows and inflows do not match exactly. In spite of these discrepancies, the data for global inflows lead to the same conclusions, in terms of which flows have been the most resilient. Another challenge is that not all countries report the split between debt and equity in the “portfolio” category, or at least not since 2005. To provide a meaningful comparison, we have therefore split Figs. 5 and 6 in two, showing first the broad “portfolio” category for the whole sample, and then the debt/equity split for the restricted sample of countries, losing in the process Argentina, China, India, Mexico and Turkey. We also omitted Saudi Arabia for data availability reasons related to other investment flows.
References
Aizenman J, Chinn MD, Hiro I (2016) Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions. J Int Money Finance 68(C):298–330
Albuquerque R (2003) The composition of international capital flows: risk sharing through foreign direct investment. J Int Econ 61(2):353–383
Alberola E, Erce A, María Serena J (2016) International reserves and gross capital flows dynamics. J Int Money Finance 60(C):151–171
Amiti M, Weinstein D (2011) Exports and financial shocks. Q J Econ 126(4):1841–1877
Beck R, Beirne J, Paternò F, Peeters J, Ramos-Tallada J, Rebillard C, Reinhardt D, Weissenseel L and Wörz J (2015) The side effects of national financial sector policies: framing the debate on financial protectionism, Occasional Paper Series, No 166, September 2015
Blanchard OJ, Chamon M, Ghosh AR, Ostry JD (2015) Are capital inflows expansionary or contractionary? Theory, policy implications, and some evidence. Centre for Economic Policy Research Discussion Papers, DP10909
Bluedorn JC, Duttagupta R, Guajardo J, Topalova P (2013) Capital flows are fickle: anytime, anywhere. International Monetary Fund, working papers 13/183
Borio C, Disyatat P (2015) Capital flows and the current account: taking financing (more) seriously. Bank for International Settlements, working paper No. 525
Bracke T, Bussière M, Fidora M, Straub R (2008) A framework for assessing global imbalances. European Central Bank, occasional paper series 78
Broner F, Didier T, Erce A, Schmukler SL (2013) Gross capital flows: dynamics and crises. J Monetary Econ Elsevier 60(1):113–133
Brukoff P, Rother B (2007) FDI may not be as stable as governments think. Magazine. International Monetary Fund Survey. https://www.imf.org/external/pubs/ft/survey/so/2007/RES051A.htm
Buch CM, Goldberg LS (2015) International banking and liquidity risk transmission: lessons from across countries. Int Monetary Fund Econ Rev 63(3)
Bussière M, Fratzscher M (2008) Financial openness and growth: short-run gain, long-run pain? Rev Int Econ 16(1):69–95
Cetorelli N, Goldberg L (2011) Global banks and international shock transmission: evidence from the crisis. Int Monetary Fund Econ Rev 9(1):41–76
Cetorelli N, Goldberg L (2012) Liquidity management of U.S. Global Banks: internal capital markets in the great recession. J Int Econ 88(2):299–311
Chor D, Manova K (2012) Off the cliff and back? Credit conditions and international trade during the global financial crisis. J Int Econ 87:117–133
Coeuré B (2015) Paradigm lost: rethinking international adjustments. Egon and Joan von Kashnitz Lecture, Clausen Center for International Business and Policy, Berkeley
Committee on the Global Financial System (CGFS) (2010) Funding patterns and liquidity management of internationally active banks. Committee on the Global Financial System Papers No 39
Committee on the Global Financial System (CGFS) (2011) Global liquidity—concept, measurement and policy implications. Committee on the Global Financial System Papers, 45
Converse N (2017) Uncertainty, capital flows and maturity mismatch. J Int Money Finance (forthcoming)
European Central Bank (ECB) (2016) Understanding the weakness in global trade—what is the new normal? European Central Bank, Occasional Paper Series 178
Erce A, Riera-Crichton D (2015) Catalytic IMF? A gross flows approach. European stability mechanism, working paper 9
Forbes K, Fratzscher M, Straub R (2015a) Capital-flow management measures: what are they good for? J Int Econ 96(S1):S76–S97
Forbes KJ, Reinhardt D, Wiedalek T (2015b) The spillovers, interactions, and (un)intended consequences of monetary and regulatory policies. In: 16th Jacques Polak annual research conference
Forbes KJ, Warnock FE (2012) Capital flow waves: surges, stops, flight, and retrenchment. J Int Econ 88(2):235–251
Fratzscher M (2011) Capital flows, push versus pull factors and the global financial crisis. J Int Econ 88(2):341–356
Gambacorta L, Van Rixtel A (2013) Structural bank regulation initiatives: approaches and implications. Bank for International Settlements, working papers No 412
Ghosh AR, Qureshi MS, Kim JI, Zalduendo J (2014) Surges. J Int Econ 92(2):266–285
Hale G, Obstfeld M (2014) The Euro and the geography of international debt flows. National bureau of economic research, working papers 20033
Hoekman B (2015) The global trade slowdown: a new normal? Centre for Economic Policy Research eBook. http://www.voxeu.org/content/global-trade-slowdown-new-normal. Accessed 24 June 2015
International Monetary Fund (IMF) (2012) The liberalization and management of capital flows: an institutional view. http://www.imf.org/external/np/pp/eng/2012/111412.pdf
International Monetary Fund (IMF) (2015) Global financial stability report—navigating monetary policy challenges and managing risks. International Monetary Fund, Washington, DC
Kaminsky G, Schmukler S (2003) Short-run pain, long-run gain: the effects of financial liberalization. National Bureau of Economic Research, working papers 9787
Levchenko AA, Mauro P (2007) Do some forms of financial flows help protect against ‘sudden stops’? World Bank Econ Rev 21(3):389–411
McQuade P, Schmitz M (2017) The great moderation in international capital flows: a global phenomenon? J Int Money Finance 73(A):188–212
Milesi-Ferretti GM, Tille C (2011) The great retrenchment: international capital flows during the global financial crisis. Econ Policy 66:28–346
Obstfeld M (2012) Does the current account still matter? Am Econ Rev 102(3):1–23
Ostry JD, Ghosh AR, Chamon M, Qureshi MS (2011) Capital controls: when and why? Int Monetary Fund Econ Rev 59:562–580
Ostry JD, Ghosh AR, Chamon M, Qureshi MS (2012) Tools for managing financial-stability risks from capital inflows. J Int Econ 88(2):407–421
Pasricha G, Falagiarda M, Bijsterbosch M, Aizenman J (2015) Domestic and multilateral effects of capital controls in emerging markets. Working Paper 2015-37
Puy D (2015) Mutual funds flows and the geography of contagion. J Int Money Finance 60(C):73–93
Reinhart C, Reinhart V (2009) Capital flow bonanzas: an encompassing view of the past and present. National Bureau of Economic Research Chapters, National Bureau of Economic Research International Seminar on Macroeconomics 2008, 9-62
Rey H (2013) Dilemma not trilemma: the global financial cycle and monetary policy independence. Jackson Hole Paper August 2013
Shin HS (2012) Global banking glut and loan risk premium. Int Monetary Fund Econ Rev 60(2):155–192
Tarullo D (2012) Regulation of foreign banking organizations. Board of Governors of the Federal Reserve System. Speech at the Yale School of Management Leaders Forum
Tarullo D (2014) Enhanced prudential standards for bank holding companies and foreign banking organizations. Opening Statement by Gov. Daniel K. Tarullo
Tille C, Van Wincoop E (2010) International capital flows. J Int Econ 80:157–175
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2018 Springer International Publishing AG, part of Springer Nature
About this chapter
Cite this chapter
Bussière, M., Schmidt, J., Valla, N. (2018). International Financial Flows in the New Normal: Key Patterns (and Why We Should Care). In: Ferrara, L., Hernando, I., Marconi, D. (eds) International Macroeconomics in the Wake of the Global Financial Crisis. Financial and Monetary Policy Studies, vol 46. Springer, Cham. https://doi.org/10.1007/978-3-319-79075-6_13
Download citation
DOI: https://doi.org/10.1007/978-3-319-79075-6_13
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-79074-9
Online ISBN: 978-3-319-79075-6
eBook Packages: Economics and FinanceEconomics and Finance (R0)