Surges of cross border capital flow: The impact of digital finance

In this paper, we empirically investigate whether and how digital finance development affects the probability of cross border capital inflow surges. Based on cross country datasets for 120 countries from 2000 to 2021, we mainly find that with a higher level of digital finance development, a country is more likely to experience capital inflow surges. We provide further evidence that digital finance promotes surges through two mechanisms: (1) financial convenience mechanism, where digital finance provides more convenient financial access and payment which enables large-scale capital inflows; (2) the contagion mechanism that investors’ sentiment may spread more broadly and rapidly as digital technology develops in the digital era. These results are robust to endogeneity issue, measurement errors and sample selections bias test, and are heterogeneous in economic development, capital account openness and exchange rate flexibility. Findings in this paper uncover the risks in the development of digital finance in the cross-border context and prompt the necessity to improve the management on capital flows in the digital era.