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Capital Flows in the Euro Area

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  • Philip R. Lane

Abstract

We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area.

Suggested Citation

  • Philip R. Lane, 2013. "Capital Flows in the Euro Area," European Economy - Economic Papers 2008 - 2015 497, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0497
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    References listed on IDEAS

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    1. Philip R. Lane & Peter McQuade, 2014. "Domestic Credit Growth and International Capital Flows," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 218-252, January.
    2. Tirole, Jean, 2012. "Country Solidarity, Private Sector Involvement and the Contagion of Sovereign Crises," IDEI Working Papers 761, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2012.
    3. Kenneth Rogoff & Jeromin Zettelmeyer, 2002. "Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001," IMF Staff Papers, Palgrave Macmillan, vol. 49(3), pages 1-8.
    4. Milesi-Ferretti, Gian Maria & Strobbe, Francesco & Tamirisa, Natalia, 2010. "Bilateral Financial Linkages and Global Imbalances: A View on The Eve of the Financial Crisis," CEPR Discussion Papers 8173, C.E.P.R. Discussion Papers.
    5. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, pages 1029-1061.
    6. André Faria & Philip R. Lane & Paolo Mauro & Gian Maria Milesi-Ferretti, 2007. "The Shifting Composition of External Liabilities," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 480-490, 04-05.
    7. Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1233-1249, September.
    8. Fagan, Gabriel & Gaspar, Ví­tor, 2007. "Adjusting to the euro," Working Paper Series 716, European Central Bank.
    9. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2009. "Where did all the borrowing go? A forensic analysis of the U.S. external position," Journal of the Japanese and International Economies, Elsevier, pages 177-199.
    10. Gian‐Maria Milesi‐Ferretti & Cédric Tille, 2011. "The great retrenchment: international capital flows during the global financial crisis," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 285-342, April.
    11. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    12. Kristin J. Forbes, 2012. "The “Big C”: identifying and mitigating contagion," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 23-87.
    13. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    14. Raphael A. Auer, 2014. "What drives TARGET2 balances? Evidence from a panel analysis," Economic Policy, CEPR;CES;MSH, vol. 29(77), pages 139-197, January.
    15. Philip R. Lane & Barbara Pels, 2012. "Current Account Imbalances in Europe," The Institute for International Integration Studies Discussion Paper Series iiisdp397, IIIS.
    16. Shiller, Robert J., 1998. "Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks," OUP Catalogue, Oxford University Press, number 9780198294184.
    17. Obstfeld, Maurice, 2013. "Finance at Center Stage: Some Lessons of the Euro Crisis," CEPR Discussion Papers 9415, C.E.P.R. Discussion Papers.
    18. Robert McCauley & Patrick McGuire & Goetz von Peter, 2010. "The architecture of global banking: from international to multinational?," BIS Quarterly Review, Bank for International Settlements, March.
    19. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
    20. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
    21. Thomas Laryea, 2010. "Approaches to Corporate Debt Restructuring in the Wake of Financial Crises," IMF Staff Position Notes 2010/02, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Bénétrix, Agustin S. & Lane, Philip R. & Shambaugh, Jay C., 2015. "International currency exposures, valuation effects and the global financial crisis," Journal of International Economics, Elsevier, pages 98-109.
    2. Schmidt, Torsten & Zwick, Lina, 2015. "Uncertainty and episodes of extreme capital flows in the Euro Area," Economic Modelling, Elsevier, vol. 48(C), pages 343-356.
    3. Benedetta Bianchi, 2016. "Sovereign Risk Premia and the International Balance Sheet: Lessons from the European Crisis," Open Economies Review, Springer, vol. 27(3), pages 471-493, July.
    4. Philip R. Lane, 2013. "Growth And Adjustment Challenges For The Euro Area," The Economic and Social Review, Economic and Social Studies, vol. 44(2), pages 273-295.
    5. van Riet, Ad, 2015. "Market-preserving fiscal federalism in the European Monetary Union," MPRA Paper 77772, University Library of Munich, Germany.
    6. Hirata, Hideaki, 2014. "Preference shocks, international frictions, and international business cycles," Journal of Asian Economics, Elsevier, pages 92-104.
    7. Bris, Arturo & Koskinen, Yrjö & Nilsson, Mattias, 2014. "The euro and corporate financing before the crisis," Journal of Financial Economics, Elsevier, vol. 114(3), pages 554-575.
    8. Philippe Martin & Thomas Philippon, 2017. "Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone," Sciences Po publications info:hdl:2441/59bp0vqv2b8, Sciences Po.
    9. Rogoff, Kenneth S. & Tashiro, Takeshi, 2015. "Japan’s exorbitant privilege," Journal of the Japanese and International Economies, Elsevier, vol. 35(C), pages 43-61.
    10. Unger, Robert, 2017. "Asymmetric credit growth and current account imbalances in the euro area," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 435-451.
    11. Philip R. Lane & Peter McQuade, 2014. "Domestic Credit Growth and International Capital Flows," Scandinavian Journal of Economics, Wiley Blackwell, pages 218-252.
    12. Saving and Investment Task Force & Rodriguez-Palenzuela, Diego & Dées, Stéphane & Andersson, Malin & Bijsterbosch, Martin & Forster, Katrin & Zorell, Nico & Audoly, Richard & Buelens, Christian & Comp, 2016. "Savings and investment behaviour in the euro area," Occasional Paper Series 167, European Central Bank.
    13. Jakob de Haan & Jeroen Hessel & Niels Gilbert, 2014. "Reforming the architecture of EMU: Ensuring stability in Europe," DNB Working Papers 446, Netherlands Central Bank, Research Department.
    14. Ondřej Šíma, 2016. "Heterogenita mobilních výrobních faktorů jako narušení podmínky optimální měnové oblasti (příklad eurozóny)
      [Heterogeneity of Mobile Factors of Production as a Disruption of the Optimal Currency Ar
      ," Politická ekonomie, University of Economics, Prague, vol. 2016(3), pages 219-337.
    15. Hans Geeroms & Pawel Karbownik, 2014. "A Monetary Union requires a Banking Union," Bruges European Economic Policy Briefings 33, European Economic Studies Department, College of Europe.
    16. Ad van Riet, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    17. repec:zbw:rwirep:0461 is not listed on IDEAS
    18. Magud, Nicolas E. & Vesperoni, Esteban R., 2015. "Exchange rate flexibility and credit during capital inflow reversals: Purgatory … not paradise," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 88-110.
    19. Bremus, Franziska & Fratzscher, Marcel, 2015. "Drivers of structural change in cross-border banking since the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 32-59.
    20. van Riet, Ad, 2016. "Safeguarding the euro as a currency beyond the state," Occasional Paper Series 173, European Central Bank.
    21. Esposito, Piero & Messori, Marcello, 2016. "Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU," SEP Working Papers 2016/3, LUISS School of European Political Economy.
    22. Torsten Schmidt & Lina Zwick, 2013. "Uncertainty and Episodes of Extreme Capital Flows in the Euro Area," Ruhr Economic Papers 0461, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    23. repec:eee:finana:v:51:y:2017:i:c:p:69-81 is not listed on IDEAS

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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