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ContentsContents
International Capital Flows Before the Crisis Describe the Patterns of Financial Integration Before the
Crisis Identify the Drivers Financial Integration Before the Crisis
International Capital Flows During the Crisis Identify the Heterogeneities of Capital Flows Analyze the Determinants of Capital Flows
International Capital Flows After the Crisis Evaluate the Prospects of International Financial
Integration
Capital Inflows/GDPCapital Inflows/GDP(1975-2009, Annual)(1975-2009, Annual)
Capital Inflows/GDPCapital Inflows/GDP(2000-2009, Quarterly)(2000-2009, Quarterly)
MotivationMotivation
What lies behind the retrenchment?
Did flows fall evenly across countries and categories of flows?
Can we link the intensity of the retrenchment to financial and macroeconomic characteristics?
Is the trend for rising financial globalization over?
The Time of Financial The Time of Financial Globalization Globalization
(1990-2007)(1990-2007)
Portfolio Growth Financial Deepening
Portfolio Re-allocation Active portfolio management favoring foreign assets
Reductions in Formal Restrictions against Capital Decreasing trend in Chin-Ito index and Schindler’s index
International Banking Operations Cross-border Lending Lending through Affiliates
Financial Deepening Financial Deepening (Financial Assets/GDP)(Financial Assets/GDP)
World MapWorld MapBefore the RetrenchmentBefore the Retrenchment
Portfolio Re-allocationPortfolio Re-allocation
Restrictions to Capital FlowsRestrictions to Capital FlowsSchindler (2009)Schindler (2009)
Capital Account LiberalizationCapital Account Liberalization(Chinn and Ito, 2008)(Chinn and Ito, 2008)
World Map World Map Before the RetrenchmentBefore the Retrenchment
The Time of Great The Time of Great RetrenchmentRetrenchment
(2007-2010)(2007-2010)
Stylized FactsStylized FactsThe Great RetrenchmentThe Great Retrenchment
Financial Regression Regression in financial deepening
Rising Home Bias Active portfolio re-allocation away from foreign assets
Heterogeneous Patterns Across Time/Countries/Types of Flows
Decreasing cross-border lending
Effective Policy Response to the Retrenchment
A Picture of Rising Home A Picture of Rising Home BiasBias
Way Too Many Way Too Many Heterogeneities!Heterogeneities!
Across Time Pre-Crisis Period (2006q1-2007q2) Initial Stage of the Crisis (August 2007 – 2008q3) Collapse Stage of the Crisis (2008q4-2009q1) Recovery Stage of the Crisis (2009q2-2009q4)
Across Countries Advanced economies vs. Emerging Economies
Across Types of Flows Debt Flows: Bonds and Bank Flows Equity Flows: FDI and Portfolio Investment Reserves and Net Derivative Flows
Developed EconomiesDeveloped Economies Gross Outflows and Inflows (USD, bn) Gross Outflows and Inflows (USD, bn)
Emerging EconomiesEmerging EconomiesGross Outflows and Inflows (USD, bn)Gross Outflows and Inflows (USD, bn)
More Pictures of More Pictures of HeterogeneityHeterogeneity
More Pictures of More Pictures of HeterogeneityHeterogeneity
More Pictures of More Pictures of HeterogeneityHeterogeneity
More Pictures of More Pictures of HeterogeneityHeterogeneity
More Pictures of More Pictures of HeterogeneityHeterogeneity
More Pictures of More Pictures of HeterogeneityHeterogeneity
Policy ResponsesPolicy Responses
Emerging Economies Foreign exchange reserves
Advanced Economies Currency Swaps by Central Banks
US 50 billion in 2008q3 US 500 billion in 2008q4
Multilateral Institutions IMF and EU
Causes and Consequences of Causes and Consequences of CrisesCrises
Incidence of Crisis Financial Excess & Macroeconomic Imbalances International Financial Linkages
Incidence of Sudden Stops Specifics and Degree of Financial Integration
Currency and Maturity Mismatch Domestic macroeconomic conditions
The ultimate recipe for sudden stop….
Drivers of the Capital FlowsDrivers of the Capital Flows A Risk PerspectiveA Risk Perspective
The effect of “risk shock” on cross-border capital flows An increase in financial risk A decrease in the risk tolerance of investors
Regress Global Capital Flows on VIX Data: 1996q1-2009q4 Control for world growth and trade openness A statistically significant association between the two
Let’s dig deeper into this risk perspective…
Risk Shock Transmission Risk Shock Transmission ChannelsChannels
Channel 1: International Trade Sharp decline in exports/imports Sharp decline in commodity prices/export revenues
Channel 2: International Financial Exposure Sell-off liquid assets a la bank runs
Channel 3: Macroeconomic conditions Weak fundamentals for pre-/during/post-crisis
periods
Channel 4: Future Economic Prospects Revisions in economic prospects
Testing different Testing different channelschannels
Dependent variableChange in capital flows relative to the pre-crisis situation
Compute for each countryCompute for collapse and recovery stagesCompute for inflows as well as outflowsScale by country GDP and/or external positions in 2005Exclude official capital flows
Testing different Testing different channelschannels
Channel 1:International Trade Regressors Trade flows (X+M) Openness to trade (X+M)/GDP Share of manufacturing in GDP Reliance on primary commodities Growth in Trading Partner
Channel 2: International Financial Exposure Regressors Size of external balance sheet (Debt vs. Equity) Net Reliance on Foreign Funds (solvency risk) Foreign Reserves
Testing for different channelsTesting for different channels
Channel 3: Macroeconomic Regressors GDP per capita GDP growth (2005-2007) Private credit/GDP
Channel 4: Future Economic Prospects Regressors Revisions in Growth Revisions in Fiscal Balance/GDP Revisions in Public Debt/GDP
Stylized FactsStylized Facts
Sudden Stop Countries Reduction in Capital inflows over 30% of GDP larger
Larger declines in capital inflows in countries with larger gross external positions in debt instruments banks that have more negative external position higher GDP per capita weaker growth and public finance prospects more openness to trade trading partners who suffered a decline in capital
inflows
Econometric AnalysisEconometric Analysis
Collapse Stage of the Crisis
Larger reductions in capital inflows for countries with larger gross bank assets and liabilities in debt
instruments faster pre-crisis growth and higher GDP per capita. slower growth in trading partners during the crisis
Larger reductions in capital outflows for countries with Larger pre-crisis cross-border debt positions Net liabilities in debt instruments
Larger reductions in banking inflows and net banking flows
Econometric AnalysisEconometric Analysis
Recovery Stage of the Crisis
Larger decline in capital inflows in countries with Larger gross debt positions Trading patners who experience slower growth Larger pre-crisis credit growth (CEE)
Larger declines in capital outflows in countries with Larger gross debt positions Oil exports dominating their trade
Evaluating the ResultsEvaluating the Results
International financial exposure matters Holdings of large debt and bank positions Dependence on external finance
International trade matters Macroeconomic conditions of trading partners Declining export revenues in commodity exporters
Macroeconomic conditions and prospects matters GDP per capita Faster pre-crisis growth Higher pre-crisis credit-growth
ConclusionsConclusions
What lies behind the retrenchment? Contraction in banking flows due to global deleveraging
and declining international banking activity
Did flows fall evenly across countries/categories of flows? Advanced economies and bank flows are affected much more
What drives the intensity of the retrenchment? Financial and macroeconomic characteristics
Future of International Future of International Financial IntegrationFinancial Integration
Financial deepening unlikely to recover soon… Weak fiscal prospects for advanced economies Concerns over financial excess by emerging markets
No more declining home bias in advanced economies
Cross-border banking activities unlikely to recover soon
Financial integration in EU has run its course