Towards a Better Understanding of International Capital Volatility

Understanding why capital moves internationally in the way that it does has become increasingly important as capital accounts have been liberalized and as the size of international capital movements has expanded dramatically. International capital movements exert potentially significant effects on many key macroeconomic variables. The pattern of capital mobility reveals considerable volatility; surges, sudden stops and reversals are common features of the contemporary landscape of financial globalization. This article draws on both economic and behavioural approaches in an attempt to offer a reasonably complete analysis of capital movements and volatility. It also relates the ideas introduced to some specific episodes where international capital volatility has been observed. A better understanding of capital volatility involves recognizing that there is no simple and universally applicable explanation that fits all types of capital in all cases.