Download The Great Retrenchment: International Capital Flows During the

Contents
 International Capital Flows Before the Crisis
 Describe the Patterns of Financial Integration Before the Crisis
 Identify the Drivers Financial Integration Before the Crisis
 International Capital Flows During the Crisis
 Identify the Heterogeneities of Capital Flows
 Analyze the Determinants of Capital Flows
 International Capital Flows After the Crisis
 Evaluate the Prospects of International Financial Integration
Capital Inflows/GDP
(1975-2009, Annual)
Capital Inflows/GDP
(2000-2009, Quarterly)
Motivation
 What lies behind the retrenchment?
 Did flows fall evenly across countries and categories of
flows?
 Can we link the intensity of the retrenchment to
financial and macroeconomic characteristics?
 Is the trend for rising financial globalization over?
The Time of Financial Globalization
(1990-2007)
 Portfolio Growth
 Financial Deepening
 Portfolio Re-allocation
 Active portfolio management favoring foreign assets
 Reductions in Formal Restrictions against Capital
 Decreasing trend in Chin-Ito index and Schindler’s index
 International Banking Operations
 Cross-border Lending
 Lending through Affiliates
Financial Deepening
(Financial Assets/GDP)
World Map
Before the Retrenchment
Portfolio Re-allocation
Restrictions to Capital Flows
Schindler (2009)
Capital Account Liberalization
(Chinn and Ito, 2008)
World Map
Before the Retrenchment
The Time of Great Retrenchment
(2007-2010)
Stylized Facts
The Great Retrenchment
 Financial Regression
 Regression in financial deepening
 Rising Home Bias
 Active portfolio re-allocation away from foreign assets
 Heterogeneous Patterns
 Across Time/Countries/Types of Flows
 Decreasing cross-border lending
 Effective Policy Response to the Retrenchment
A Picture of Rising Home Bias
Way Too Many Heterogeneities!
 Across Time
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Pre-Crisis Period (2006q1-2007q2)
Initial Stage of the Crisis (August 2007 – 2008q3)
Collapse Stage of the Crisis (2008q4-2009q1)
Recovery Stage of the Crisis (2009q2-2009q4)
 Across Countries
 Advanced economies vs. Emerging Economies
 Across Types of Flows
 Debt Flows: Bonds and Bank Flows
 Equity Flows: FDI and Portfolio Investment
 Reserves and Net Derivative Flows
Developed Economies
Gross Outflows and Inflows (USD, bn)
Emerging Economies
Gross Outflows and Inflows (USD, bn)
More Pictures of Heterogeneity
More Pictures of Heterogeneity
More Pictures of Heterogeneity
More Pictures of Heterogeneity
More Pictures of Heterogeneity
More Pictures of Heterogeneity
Policy Responses
 Emerging Economies
 Foreign exchange reserves
 Advanced Economies
 Currency Swaps by Central Banks
 US 50 billion in 2008q3
 US 500 billion in 2008q4
 Multilateral Institutions
 IMF and EU
Causes and Consequences of Crises
 Incidence of Crisis
 Financial Excess & Macroeconomic Imbalances
 International Financial Linkages
 Incidence of Sudden Stops
 Specifics and Degree of Financial Integration
 Currency and Maturity Mismatch
 Domestic macroeconomic conditions
 The ultimate recipe for sudden stop….
Drivers of the Capital Flows
A Risk Perspective
 The effect of “risk shock” on cross-border capital flows
 An increase in financial risk
 A decrease in the risk tolerance of investors
 Regress Global Capital Flows on VIX
 Data: 1996q1-2009q4
 Control for world growth and trade openness
 A statistically significant association between the two
 Let’s dig deeper into this risk perspective…
Risk Shock Transmission Channels
 Channel 1: International Trade
 Sharp decline in exports/imports
 Sharp decline in commodity prices/export revenues
 Channel 2: International Financial Exposure
 Sell-off liquid assets a la bank runs
 Channel 3: Macroeconomic conditions
 Weak fundamentals for pre-/during/post-crisis periods
 Channel 4: Future Economic Prospects
 Revisions in economic prospects
Testing different channels
 Dependent variable
Change in capital flows relative to the pre-crisis situation
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Compute for each country
Compute for collapse and recovery stages
Compute for inflows as well as outflows
Scale by country GDP and/or external positions in 2005
Exclude official capital flows
Testing different channels
 Channel 1:International Trade Regressors
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Trade flows (X+M)
Openness to trade (X+M)/GDP
Share of manufacturing in GDP
Reliance on primary commodities
Growth in Trading Partner
 Channel 2: International Financial Exposure Regressors
 Size of external balance sheet (Debt vs. Equity)
 Net Reliance on Foreign Funds (solvency risk)
 Foreign Reserves
Testing for different channels
 Channel 3: Macroeconomic Regressors
 GDP per capita
 GDP growth (2005-2007)
 Private credit/GDP
 Channel 4: Future Economic Prospects Regressors
 Revisions in Growth
 Revisions in Fiscal Balance/GDP
 Revisions in Public Debt/GDP
Stylized Facts
 Sudden Stop Countries
 Reduction in Capital inflows over 30% of GDP larger
 Larger declines in capital inflows in countries with
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larger gross external positions in debt instruments
banks that have more negative external position
higher GDP per capita
weaker growth and public finance prospects
more openness to trade
trading partners who suffered a decline in capital
inflows
Econometric Analysis
Collapse Stage of the Crisis
 Larger reductions in capital inflows for countries with
 larger gross bank assets and liabilities in debt instruments
 faster pre-crisis growth and higher GDP per capita.
 slower growth in trading partners during the crisis
 Larger reductions in capital outflows for countries with
 Larger pre-crisis cross-border debt positions
 Net liabilities in debt instruments
 Larger reductions in banking inflows and net banking
flows
Econometric Analysis
 Recovery Stage of the Crisis
 Larger decline in capital inflows in countries with
 Larger gross debt positions
 Trading patners who experience slower growth
 Larger pre-crisis credit growth (CEE)
 Larger declines in capital outflows in countries with
 Larger gross debt positions
 Oil exports dominating their trade
Evaluating the Results
 International financial exposure matters
 Holdings of large debt and bank positions
 Dependence on external finance
 International trade matters
 Macroeconomic conditions of trading partners
 Declining export revenues in commodity exporters
 Macroeconomic conditions and prospects matters
 GDP per capita
 Faster pre-crisis growth
 Higher pre-crisis credit-growth
Conclusions
 What lies behind the retrenchment?
 Contraction in banking flows due to global deleveraging and
declining international banking activity
 Did flows fall evenly across countries/categories of flows?
 Advanced economies and bank flows are affected much more
 What drives the intensity of the retrenchment?
 Financial and macroeconomic characteristics
Future of International Financial
Integration
 Financial deepening unlikely to recover soon…
 Weak fiscal prospects for advanced economies
 Concerns over financial excess by emerging markets
 No more declining home bias in advanced economies
 Cross-border banking activities unlikely to recover soon
 Financial integration in EU has run its course