Abstract
This paper assesses the international comovement of gross capital inflows and outflows using a two-level factor model. Among advanced and emerging countries, capital flows exhibit strong commonality: common (global and country group-specific) factors account, on average, for close to half of their variance. There is a contrast across groups: common factors dominate advanced-country capital flows, while idiosyncratic factors dominate emerging- country flows and, especially, developing-country flows. The reason is the much larger role of global factors among advanced countries. Importantly, these findings apply to both inflows and outflows: their respective common factors are very similar -- although global factors play a bigger role for outflows than for inflows. The commonality of flows reflects a global cycle, summarized by a small set of variables (the VIX, the U.S. real interest rate and real exchange rate, U.S. GDP growth, and world commodity prices) that explain much of the variance of the estimated factors -- especially the global factors. Over time, the quantitative role of the common factors exhibits aglobalizationstage up to 2007, during which they acquire growing importance, followed by a phase ofdeglobalizationpost-crisis. Greater financial openness, deeper financial systems, and more rigid exchange rate regimes amplify countries'exposure to the global financial cycle.
Highlights
There is wide consensus that capital ‡ows can have major consequences for macroeconomic and ...nancial stability in both source and destination countries
Following the global crisis, increasing attention has focused on the global factors that may drive in‡ows and out‡ows across the world, and on the implications of the international comovement of capital ‡ows for the ability of national policy makers to shelter their economies from global ...nancial shocks
Greater ...nancial depth is associated with a bigger role of common factors, for both in‡ows and out‡ows, which again is primarily due to the larger variance contribution of the global factors – the di¤erence between both country groups along this dimension seems to have narrowed after the global crisis
Summary
There is wide consensus that capital ‡ows can have major consequences for macroeconomic and ...nancial stability in both source and destination countries. In‡uential contributions by Rey (2013) and Miranda-Agrippino and Rey (2015) conclude that one latent global factor accounts for much of the variance of capital ‡ows and risky asset returns around the world They interpret this result as evidence of a global ...nancial cycle, driven by investors’time-varying risk aversion – they do not o¤er an explicit assessment of its quantitative importance. The di¤erence is primarily due to the action of the global factors: their average variance contribution is over twice as large among advanced countries as among the rest.[4] These results apply to both gross in‡ows and gross out‡ows.
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