Capital flows, push versus pull factors and the global financial crisis

TLDR: In this article, a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies was employed to find that common shocks such as key crisis events as well as changes to global liquidity and risk have exerted a large effect on capital flows both in the crisis and in the recovery.

About: This article is published in Journal of International Economics.The article was published on 2012-11-01 and is currently open access. It has received 471 citations till now. The article focuses on the topics: Country risk & Financial crisis.

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Table 10 indicates that – when estimating the model over both crisis and non-crisis periods – there are some systematic relationships between the quality of fundamentals or institutions, financial policies or openness, on the one hand, and the strength with which shocks affect global capital flows, on the other. The null hypothesis (shown in the second row of the table) consistent with a particular instrument Zi,t helping to reduce the effect of a specific shocks is in some cases confirmed, though the effects are modest in size.

Figure 9 (cont.): Determinants of capital flows during crisis – dynamic effects

Table 10 indicates that – when estimating the model over both crisis and non-crisis periods – there are some systematic relationships between the quality of fundamentals or institutions, financial policies or openness, on the one hand, and the strength with which shocks affect global capital flows, on the other. The null hypothesis (shown in the second row of the table) consistent with a particular instrument Zi,t helping to reduce the effect of a specific shocks is in some cases confirmed, though the effects are modest in size.

Figure 9 (cont.): Determinants of capital flows during crisis – dynamic effects

Figure 7: Goodness of fit – actual versus fitted capital flows in crisis

Figures 3 – 4

Frequently asked questions

Q1. What are the contributions in this paper?

This paper analyzed the role of different drivers of global capital flows during the crisis and the subsequent recovery, focusing on two questions: first, how important have been common, global shocks for capital flows ? And second, how relevant have been macroeconomic policies, institutions and financial policies in helping countries shield themselves from such global shocks ? 

Q2. What are the main drivers of global capital flows?

EME policy-makers have stressed the importance of “push” factors, i.e. in particular monetary and fiscal policies in advanced economies, as the main culprits behind this surge in capital flows. 

Q3. What is the effect of common shocks on global capital flows?

The findings indicate that common shocks – such as specific crisis events, changes to global liquidity and risk conditions – have exerted a substantial effect on global capital flows. 

Q4. What is the only fundamental that has the opposite sign from the null hypothesis?

The only fundamental that persistently has the opposite sign from the null is for FX reserve holdings, implying that countries with high reserve holdings suffered larger capital outflows during the crisis and were also more exposed to common and idiosyncratic shocks. 

Q5. How long does the period analyzed last?

in order to have a stable sample of funds, the period analyzed is limited to start on 12 October 2005 and end on 22 November 2010. 

Q6. What was the main argument before the 2007-08 crisis?

Many observers argued before the crisis that such a status quo was unsustainable and that ultimately deficit countries, such as the United States, would see capital inflows dwindle and exchange rates and asset prices fall during an adjustment process. 

Q7. What is the purpose of the paper?

The objective of the paper is to analyze the role of different drivers of global capital flows during the crisis and the subsequent recovery. 

Q8. What is the opposite of the case if the shock has a positive sign on capital flows?

The opposite is the case if the shock has a positive sign on capital flows overall, so that 1 > 0 means that the transmission of the shock is magnified.