Global drivers of gross and net capital flows

Abstract

Prior to the global financial crisis the empirical international capital flow literature focused on net capital flows (the current account), but since the crisis there has been an increased focus on gross flows. We jointly analyze global drivers of gross outflows, gross inflows, and net flows (outflows minus inflows) by estimating a latent factor model. We find evidence of two global factors, which we call the global financial cycle (GFC) factor and an energy price factor as they closely track respectively the Miranda-Agrippino and Rey asset price factor and an average of oil and gas prices. These factors together account for half the variance of gross flows in advanced countries and 40% of the variance of gross flows in emerging markets. But remarkably, they also account for 40% of the variance of net capital flows in both groups of countries. We analyze the heterogeneity across countries in the impact of the two factors. The impact of the GFC factor on both gross and net capital flows is stronger in countries that have larger net debt liabilities. Other asset classes (FDI and portfolio equity) are not associated with increased exposure to the GFC factor.