Gross capital flows by banks, corporates and sovereigns

Focus

International capital flows can have a significant impact on macroeconomic outcomes. Thus, understanding their properties and drivers is of crucial importance. A number of studies have examined aggregate capital flows from various angles. Yet, the existing literature on gross capital flows has largely ignored their sectoral composition. This important gap is due mainly to the scarcity of data on gross capital flows, broken down by sector.

Contribution

We construct a new data set, in which we break down gross capital flows by sector (banks, corporates and sovereigns). To maximise coverage, we combine data from the Balance of Payments with other data sources, such as the BIS international banking statistics and the BIS international debt securities statistics. Our data set provides information on both capital inflows (85 countries from Q1 1996 to Q4 2014) and outflows (31 countries from Q1 2004 to Q4 2014) at a quarterly frequency. We focus mainly on debt flows. Using this data set, we show that the properties and drivers of capital flows vary considerably across sectors, instruments and country groups.

Findings

We document four new empirical facts. First, banks in advanced economies are responsible for the high correlation between capital inflows and outflows. Second, the private sector is the main driver of the procyclicality of capital inflows. By contrast, inflows to emerging market sovereigns move countercyclically. Third, advanced economy banks and emerging market sovereigns drive the procyclicality of capital outflows. Fourth, when global risk aversion is high, private sector flows decline, while sovereign flows show no significant response.

Abstract

We construct a new data set of quarterly international capital flows by sector, with an emphasis on debt flows. Using our new data set, we establish four facts. First, the co-movement of capital inflows and outflows is driven by inflows and outflows vis-à-vis the domestic banking sector. Second, the procyclicality of capital inflows is driven by banks and corporates, whereas sovereigns' external liabilities move acyclically in advanced and countercyclically in emerging countries. Third, the procyclicality of capital outflows is driven by advanced countries' banks and emerging countries' sovereigns (reserves). Fourth, capital inflows and outflows decline for banks and corporates when global risk aversion (VIX) increases, whereas sovereign flows show no response. These facts are inconsistent with a large class of theoretical models.

JEL classification: F21, F41, O1

Keywords: quarterly capital flows, business cycles, external corporate and bank debt, sovereign debt, VIX, systemic risk, emerging markets