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International reserves and gross capital flow dynamics

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  • Enrique Alberola-Ila
  • Aitor Erce
  • José María Serena

Abstract

This paper explores the role of international reserves as a stabiliser of international capital flows, in particular during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behaviour of gross capital flows. We analyse an extensive cross-country quarterly database, comprising 63 countries for the period 1991-2010, using standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves act as a buffer during financial stress. A robust result of the analysis is that international reserves facilitate financial disinvestment overseas by residents - a fall in capital outflows. This partially offsets the drop in foreign capital inflows observed in such periods. For the whole sample, we also find that larger stocks of international reserves are linked to higher gross inflows and lower gross outflows. These results, which challenge current approaches to measuring reserve adequacy, call for refining such tools to better account for the role of resident investors.

Suggested Citation

  • Enrique Alberola-Ila & Aitor Erce & José María Serena, 2015. "International reserves and gross capital flow dynamics," BIS Working Papers 512, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:512
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    Cited by:

    1. repec:eee:intfin:v:51:y:2017:i:c:p:142-154 is not listed on IDEAS
    2. McQuade, Peter & Schmitz, Martin, 2017. "The great moderation in international capital flows: A global phenomenon?," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 188-212.
    3. Olivier Blanchard & Gustavo Adler & Irineu de Carvalho Filho, 2015. "Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks?," Working Paper Series WP15-18, Peterson Institute for International Economics.
    4. Woon Gyu Choi & Byongju Lee & Taesu Kang & Geun-Young Kim, 2016. "Divergent EME Responses to Global and Domestic Monetary Policy Shocks," Working Papers 2016-15, Economic Research Institute, Bank of Korea.
    5. Michael F. Bleaney & Mo Tian & Lin Yin, 2017. "De Facto Exchange Rate Regime Classifications: An Evaluation," Open Economies Review, Springer, vol. 28(2), pages 369-382, April.
    6. Stracca, Livio & Scheubel, Beatrice, 2016. "What do we know about the global financial safety net? Rationale, data and possible evolution," Occasional Paper Series 177, European Central Bank.
    7. Cheng, Gong, 2015. "Balance sheet effects, foreign reserves and public policies," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 146-165.
    8. Beatrice D. Scheubel & Livio Stracca, 2016. "What Do We Know About the Global Financial Safety Net? A New Comprehensive Data Set," CESifo Working Paper Series 6184, CESifo Group Munich.
    9. Broos, Menno & Ghalanos, Michalis & Kennedy, Bernard & Landbeck, Alexander & Lerner, Christina & Menezes, Paula & Schiavone, Alessandro & Tilley, Thomas & Viani, Francesca & Reinhardt, Dennis & Metzem, 2016. "Dealing with large and volatile capital flows and the role of the IMF," Occasional Paper Series 180, European Central Bank.
    10. repec:sgh:gosnar:y:2017:i:6:p:5-29 is not listed on IDEAS
    11. Jean-Pierre Allegret & Audrey Allegret, 2018. "Did Foreign Exchange Holding Influence Growth Performance During The Global Financial Crisis?," Post-Print hal-01820698, HAL.

    More about this item

    Keywords

    Gross capital flows; international reserves; systemic crises; capital retrenchment;

    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
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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