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Sudden stops: Are global and local investors alike?

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  • Calderón, César
  • Kubota, Megumi

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 1 ()
Pages: 122-142

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Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:122-142

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Sudden stop; Gross capital flows; Reversals;

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Cited by:
  1. Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2011. "Gross capital flows: dynamics and crises," Banco de Espa�a Working Papers 1039, Banco de Espa�a.
  2. Calderon, Cesar & Kubota, Megumi, 2012. "Gross inflows gone wild : gross capital inflows, credit booms and crises," Policy Research Working Paper Series 6270, The World Bank.
  3. Gustavo Adler & Marie-Louise Djigbenou & Sebastian Sosa, 2014. "Global Financial Shocks and Foreign Asset Repatriation: Do Local Investors Play a Stabilizing Role?," IMF Working Papers 14/60, International Monetary Fund.
  4. Torsten Schmidt & Lina Zwick, 2013. "Uncertainty and Episodes of Extreme Capital Flows in the Euro Area," Ruhr Economic Papers 0461, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  5. Davide Romelli & Cristina Terra & Enrico Vasconcelos, 2014. "Current Account and Real Exchange Rate changes: the Impact of Trade Openness," THEMA Working Papers 2014-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  6. Calderon, Cesar & Kubota, Megumi, 2014. "Ride the wild surf : an investigation of the drivers of surges in capital inflows," Policy Research Working Paper Series 6753, The World Bank.
  7. Roland Döhrn & Philipp an de Meulen & Daniela Grozea-Helmenstein & Tobias Kitlinksi & Torsten Schmidt & Simeon Vosen & Lina Zwick, 2013. "Die wirtschaftliche Entwicklung im Ausland: Wieder stärkere Expansion in den Industrieländern," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 36, 09.

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