Debt- and Equity-Led Capital Flow Episodes

Abstract

Our earlier work has helped to switch the focus of studies of extreme capital flow movements toward the use of data on gross inflows (mainly driven by foreigners) and outflows (mainly driven by domestics) rather than relying on net flows (the sum of the two) (Forbes and Warnock 2012). The old focus on net flows is understandable: in the early and mid-1990s net capital inflows roughly mirrored gross inflows so the capital outflows of domestic investors could often be ignored and changes in net inflows could be interpreted as being driven by changes in foreign flows. More recently however the size and volatility of gross flows have increased while net capital flows have been more stable which heightens the importance of differentiating between gross inflows and gross outflows. Foreign and domestic investors can be motivated by different factors and respond differently to various policies and shocks. Policymakers might also react differently based on whether episodes of extreme capital flow movements are triggered by domestic or foreign sources. Analysis based solely on net flows while appropriate a few decades ago would miss the dramatic changes in gross flows that have occurred over the past decade and disregard important information contained in the these flows. As domestic investors’ flows have become increasingly important changes in net flows can no longer be interpreted as being driven solely by foreigners. This point is made forcefully in Forbes and Warnock (2012).