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The cyclicality of (bilateral) capital inflows and outflows

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  • J. Scott Davis
Abstract
Recent research has shown that gross capital inflows and outflows are positively correlated and highly procyclical. This poses a puzzle since most theory predicts that capital inflows and outflows should be negatively correlated, and while capital inflows should be procyclical, capital outflows should be countercyclical. This previous work has examined the behavior of aggregate capital inflows and outflows (capital flows between a country and the rest of the world). This paper shows that bilateral capital inflows and outflows (flows between a pair of countries) are also positively correlated and strongly procyclical. This empirical finding poses a new puzzle. The data suggests that any model that can explain capital flows at the bilateral level needs to rely on market incompleteness and non-diversification. In addition, the data suggests that this positive correlation and procyclicality is largely the feature of crisis episodes. After controlling for crisis episodes, we find that bilateral capital flows move positively with GDP in the country receiving the capital and co-move negatively in the country sending the capital.

Suggested Citation

  • J. Scott Davis, 2015. "The cyclicality of (bilateral) capital inflows and outflows," Globalization Institute Working Papers 247, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:247
    DOI: 10.24149/gwp247
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    References listed on IDEAS

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    Cited by:

    1. Yang Yang & Haizhen Yang & Mengting Zhang, 2021. "A Cross-Country Analysis on Capital Flows Cycle: Stylized Facts and Regional Synchronization," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(5), pages 347-364, May.
    2. Davis, J. Scott & Valente, Giorgio & van Wincoop, Eric, 2021. "Global drivers of gross and net capital flows," Journal of International Economics, Elsevier, vol. 128(C).
    3. Davis, J. Scott & Van Wincoop, Eric, 2018. "Globalization and the increasing correlation between capital inflows and outflows," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 83-100.
    4. Lepers, Etienne & Mercado, Rogelio, 2021. "Sectoral capital flows: Covariates, co-movements, and controls," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    5. Cuadra, Gabriel & Menna, Lorenzo, 2019. "Capital flows and the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 106(C), pages 1-1.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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