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International Capital Mobility and Financial Fragility - Part 4. Which Structural Policies Stabilise Capital Flows When Investors Suddenly Change Their Mind?: Evidence from Bilateral Bank Data

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  • Rudiger Ahrend
  • Cyrille Schwellnus

Abstract

The global financial crisis of 2007-09 and the ensuing sovereign debt crisis in Europe provide evidence that portfolio rebalancing of financial investors can contribute to spread financial turmoil across countries. Rebalancing of portfolios, in turn, may be driven by the need to meet liquidity or capital requirements, or by sudden changes in investor sentiment. This paper tests explicitly for the change-insentiment channel of financial contagion. Using bilateral bank data and an instrumental variables technique that allows focusing on changes in investors’ country assessments that are unrelated to fundamentals, changes in investor sentiment are indeed found to drive capital flows. Sentiment-driven capital flows are found to be smaller in countries with a tougher regulatory stance, such as stricter banking supervision or enhanced financial transparency. Flux de capitaux internationaux et fragilité financière : Partie 4. Quelles politiques structurelles stabilisent les flux de capitaux quand les investisseurs changent de perceptions ? Une analyse empirique sur données bancaires bilatérales La crise financière de 2007-09 et la crise de la dette souveraine en Europe qui s’ensuivit démontrent que les rééquilibrages de portefeuilles des investisseurs peuvent contribuer à propager l’instabilité financière entre pays. Ces rééquilibrages peuvent être motivés par le besoin de satisfaire des seuils de liquidité ou de capital, ou par de soudains changements de perceptions. Cet article teste si les changements de perceptions des investisseurs internationaux constituent un vecteur de contagion financière. En utilisant des données bancaires bilatérales et une technique de variables instrumentales qui permet d’isoler des changements de perceptions des investisseurs indépendants des fondamentaux des pays de destination, l’analyse empirique montre que les changements de perceptions ont un effet sur les flux de capitaux. Les flux de capitaux causés par les changements de perceptions sont moindres dans les pays ayant une régulation financière plus exigeante, par exemple une supervision bancaire plus stricte ou une plus grande transparence financière.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 967.

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Date of creation: 12 Jun 2012
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Handle: RePEc:oec:ecoaaa:967-en

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  1. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
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  7. Romain Duval & Lukas Vogel, 2008. "Economic resilience to shocks: The role of structural policies," OECD Journal: Economic Studies, OECD Publishing, vol. 2008(1), pages 1-38.
  8. Reuven Glick & Andrew K. Rose, 1998. "Contagion and trade: why are currency crises regional?," Pacific Basin Working Paper Series 98-03, Federal Reserve Bank of San Francisco.
  9. Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October.
  10. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
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