Sudden stops: Are global and local investors alike?

Our main goal is to characterize the determinants of sudden stops caused by domestic vis-à-vis foreign residents. Are the decisions of domestic investors to invest abroad or of foreign investors to cut off funds from the domestic economy governed by the same set of determinants? Given the distribution of different types of sudden stop episodes over time and its different macroeconomic consequences, we argue that their determinants may not be alike. One of the novel aspects of this paper is to characterize sudden stops in capital flows (frequency, consequences and determinants) using quarterly data on gross flows for a wide array of countries from 1975 to 2010. We find that foreign investors are less likely to stop bringing capital when the domestic economy is growing and its performance is leveraged by positive external shocks. Domestic agents, on the other hand, are more willing to invest abroad if there are high external savings (current account surpluses), especially in natural-resource abundant countries. Rising financial openness makes the domestic country more vulnerable to sudden stops caused by either local or global investors. Finally, rising risk aversion in world capital markets tend to reduce the likelihood of outflow-driven stops—which may signal a larger propensity towards capital repatriation by domestic investors.