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The Great Retrenchment: International Capital Flows During the Global Financial Crisis

The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first across time, being especially dramatic in the wake of the Lehman Brothers’ failure, second across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception, and third across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature—with countries relying on bank flows being the hardest hit—as well as domestic macroeconomic conditions and their connection to world trade flows.

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File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP18-2010.pdf
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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 18-2010.

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Length: 55 pages
Date of creation: 01 Jun 2010
Date of revision: 15 Sep 2010
Handle: RePEc:gii:giihei:heidwp18-2010
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  1. Giorgio Barba Navaretti & Giacomo Calzolari & Alberto Franco Pozzolo & Micol Levi, 2010. "Multinational Banking in Europe: Financial Stability and Regulatory Implications. Lessons from the Financial Crisis," Development Working Papers 292, Centro Studi Luca d\'Agliano, University of Milano, revised 30 Apr 2010.
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  11. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2011. "Market Freedom and the Global Recession," IMF Economic Review, Palgrave Macmillan, vol. 59(1), pages 111-135, April.
  12. Laura Alfaro & Sebnem Kalemli-Ozcan & Selin Sayek, 2009. "FDI, Productivity and Financial Development," The World Economy, Wiley Blackwell, vol. 32(1), pages 111-135, 01.
  13. Christopher W. Crowe & Jonathan David Ostry & Jun Il Kim & Marcos Chamon & Atish R. Ghosh, 2009. "Coping with the Crisis: Policy Options for Emerging Market Countries; Policy Options for Emerging Market Countries," IMF Staff Position Notes 2009/08, International Monetary Fund.
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  15. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops, and Current-Account Reversals," American Economic Review, American Economic Association, vol. 94(2), pages 59-64, May.
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