| Abstract: |
While prior to the global financial crisis the empirical international capital
flow literature has focused on net capital flows (the current account), since
the crisis there has been an increased focus on gross flows. In this paper we
jointly analyze global drivers of gross flows (outflows plus inflows) and net
flows (outflows minus inflows) by estimating a latent factor model. We find
evidence of two global factors, which we call the GFC (global financial cycle)
factor and commodity price factor as they closely track respectively the
Miranda-Agrippino and Rey asset price factor and an average of oil and gas
prices. These factors together account for half the variance of gross flows in
advanced countries and forty percent of the variance of gross flows in
emerging markets. But remarkably, they also account for forty percent of the
variance of net capital flows in both groups of countries. We also analyze the
heterogeneity across countries in the impact of the two factors. One of the
key findings is that the impact of the GFC factor on both gross and net
capital flows is stronger in countries that have larger net debt liabilities.
Other asset classes (FDI and portfolio equity) do not significantly impact the
exposure to the GFC factor. |