Duration of Capital Flows: Analysis for Emerging and Advanced Economies

Abstract

International capital flows saw a dramatic increase in the mid-2000s. However, during the 2008 crisis there has been a reversals of capital flows. With the increased volume and volatility of capital flows during and after the 2008 global crisis period, and the associated risks, many studies have focused on speculative capital movements in the pre-and post-crisis period. There is also an interest on the sustainability of capital inflow episodes. In our study, we examine the effect of capital flow duration on capital movements. For that reason, a special technique called “duration analysis” which is a method that specifically enables the prediction of time to an event will be used. This technique enables us to predict the probability of continuation (or termination) of an ongoing large capital flow cycle by considering the effect of the duration of that cycle. Recently there has been a marked divergence in the behavior of gross and net capital flows. While net capital flows remained relatively more stable, the size and volatility of gross inflows and outflows flows have increased in the recent years. In our research, the “sustainability” of different types of capital movements will be examined, taking into account the distinction between domestic and foreign investors. While examining the capital movements cycles, different components, namely portfolio investments (with the distinction between debt securities and stocks) and other investments (mostly interbank debt derivatives), will be handled separately, taking into account the difference between foreign and domestic investors. The structure and behavior of capital flows vary by the development stage of countries. More frequent volatility leaps are encountered in capital flows to emerging and developing countries as compared to developed countries, which renders the former countries more prone to crises. In that regard, we ask whether the capital flow cycles differ between advanced and emerging economies and investigate differences in capital flow sustainability for these groups separately. Furthermore, considering that sustainability may vary in different periods such as crisis vs tranquil times, we perform sustainability analysis separately for the pre and post Global Financial Crisis period. In summary, we study how the duration effects the sustainability of different capital flows. We compare the sustainability of different capital movement components between advanced and emerging countries, and also before and after the global financial crisis. Determining the sustainability of capital movements is an important economic policy question for all countries. It is important for domestic regulations, especially for developing early prevention systems against sudden capital movement returns, developing international cooperation and decisions for trade and capital movements. In addition, knowing the differences foreseen in sustainability for different types of capital flows will guide international investor decisions.