Not All Surges of Gross Capital Inflows Are Alike

This paper looks into the transition of a surge episode to a stop episode and differentiates between two types of surges, namely surges that end in stops and surges that end in normal episodes. Previous studies on capital flows show that surges end in output contraction, crises, and reversals of capital inflows. However, when one looks closely at the data, more than half of surges end in normal episodes at least four quarters following the last surge quarter. This study focuses on global and domestic factors that strongly correlate with the transition of surges to either stop or normal episodes, as well as which factors correlate with the magnitude of gross inflows for these two types of surges. The results show that the higher likelihood of experiencing surges ending in stops is significantly correlated with lower global risk aversion and with higher domestic output gap. The estimates also indicate that surges ending in stops are different from surges ending in normal episodes. For instance, while global risk aversion and domestic credit are significant for both surges, larger gross capital inflows are significantly correlated with higher global commodity prices for surges ending in stops, but with lower commodity prices for surges ending in normal episodes.