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International Capital Mobility and Financial Fragility - Part 4. Which Structural Policies Stabilise Capital Flows When Investors Suddenly Change Their Mind?: Evidence from Bilateral Bank Data

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  • Rudiger Ahrend

    (OECD)

  • Cyrille Schwellnus

    (OECD)

Abstract

The global financial crisis of 2007-09 and the ensuing sovereign debt crisis in Europe provide evidence that portfolio rebalancing of financial investors can contribute to spread financial turmoil across countries. Rebalancing of portfolios, in turn, may be driven by the need to meet liquidity or capital requirements, or by sudden changes in investor sentiment. This paper tests explicitly for the change-insentiment channel of financial contagion. Using bilateral bank data and an instrumental variables technique that allows focusing on changes in investors’ country assessments that are unrelated to fundamentals, changes in investor sentiment are indeed found to drive capital flows. Sentiment-driven capital flows are found to be smaller in countries with a tougher regulatory stance, such as stricter banking supervision or enhanced financial transparency. Flux de capitaux internationaux et fragilité financière : Partie 4. Quelles politiques structurelles stabilisent les flux de capitaux quand les investisseurs changent de perceptions ? Une analyse empirique sur données bancaires bilatérales La crise financière de 2007-09 et la crise de la dette souveraine en Europe qui s’ensuivit démontrent que les rééquilibrages de portefeuilles des investisseurs peuvent contribuer à propager l’instabilité financière entre pays. Ces rééquilibrages peuvent être motivés par le besoin de satisfaire des seuils de liquidité ou de capital, ou par de soudains changements de perceptions. Cet article teste si les changements de perceptions des investisseurs internationaux constituent un vecteur de contagion financière. En utilisant des données bancaires bilatérales et une technique de variables instrumentales qui permet d’isoler des changements de perceptions des investisseurs indépendants des fondamentaux des pays de destination, l’analyse empirique montre que les changements de perceptions ont un effet sur les flux de capitaux. Les flux de capitaux causés par les changements de perceptions sont moindres dans les pays ayant une régulation financière plus exigeante, par exemple une supervision bancaire plus stricte ou une plus grande transparence financière.

Suggested Citation

  • Rudiger Ahrend & Cyrille Schwellnus, 2012. "International Capital Mobility and Financial Fragility - Part 4. Which Structural Policies Stabilise Capital Flows When Investors Suddenly Change Their Mind?: Evidence from Bilateral Bank Data," OECD Economics Department Working Papers 967, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:967-en
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    File URL: http://dx.doi.org/10.1787/5k97fmss637j-en
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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