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The Dynamics of Capital Flow Episodes

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  • Christian Friedrich
  • Pierre Guérin

Abstract

This paper proposes a novel methodology for identifying episodes of strong capital flows based on a regime-switching model. In comparison with the existing literature, a key advantage of our methodology is to estimate capital flow regimes without the need for context- and sample-specific assumptions. We implement this approach using weekly fund flows data for a large set of advanced and emerging economies. As an application of our methodology to the global financial cycle literature, we use a time-varying structural vector-autoregressive (VAR) model to assess the impact of U.S. stock market volatility (VIX) shocks and U.S. monetary policy shocks on aggregated measures of equity outflow and equity inflow episodes. Our results indicate that both VIX and U.S. monetary policy shocks had substantially time-varying effects on episodes of strong capital flows over our sample period.

Suggested Citation

  • Christian Friedrich & Pierre Guérin, 2016. "The Dynamics of Capital Flow Episodes," Staff Working Papers 16-9, Bank of Canada.
  • Handle: RePEc:bca:bocawp:16-9
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Avdjiev, Stefan & Hale, Galina, 2019. "U.S. monetary policy and fluctuations of international bank lending," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 251-268.
    2. Soohyon Kim, 2018. "Determinants of Capital Flows in the Korean Bond Market," Working Papers 2018-44, Economic Research Institute, Bank of Korea.

    More about this item

    Keywords

    Econometric and statistical methods; International financial markets; International topics; Uncertainty and monetary policy;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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