Central Bank of Chile paper identifies causes of sudden capital flows

Working paper assesses factors leading to sudden surges of capital in and out of economies; finds the majority of cases are driven primarily by changes in debt flows
Central Bank of Chile
Photo: Central Bank of Chile/Wikimedia Commons

A working paper published by the Central Bank of Chile in August studies the factors behind sharp changes in capital flows, finding that debt is the most important determinant.

The authors, Kristin Forbes and Francis Warnock, analyse data on gross movements of capital in and out of 50 emerging and developed countries over the period 1980–2009. The paper finds that 80% of inward flows and 70% of outward are primarily caused by changes in debt flows. These debt dynamics, the authors say, are driven by investors' risk aversion and regional contagion effects.

As a result, "understanding debt flows is critically important to understanding extreme capital flow movements", the researchers say. They suggest that work studying credit booms is particularly relevant and argue more work in needed in understanding capital flight and retrenchment.

Click here to read the paper.

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