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How Common are Capital Flows Surges? How They are Measured Matters -a Lot

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Abstract

In recent years there have been a number of highly publicized episodes of large international capital flow surges and dramatic reversals. This paper addresses several issues surrounding such episodes. We investigate how frequent are capital surges and have they been increasing over time. This requires dealing with the issue of how capital flow surges are measured. In our review of recent studies we found that a wide variety of measures have been used and that most studies have paid little attention to the measures used in other studies. To examine how much the identification of surge episodes varied according to the different measures, we selected seven measures from the recent literature and applied them on a common dataset of 46 countries for the period 1980 to 2010. The differences in the numbers of episodes identified by the various methods were far from trivial. In fact they varied by a factor of almost three. However, across most measures, we found that there was a substantial increase in surges from the 1980s period to 1990s. Whether there was a further increase during the 2000s varied by the measure used. These findings highlight a need to devote more attention to how surges may best be measured.

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Notes

  1. Reinhart and Reinhart (2008) refer to these as capital flow bonanzas.

  2. A recent study by Molnar et al. (2013) that only came to our attention after this paper was substantially completed uses a measurement that compares the size of countries’ inflows with group inflows rather than just its own history

  3. An alternative to filtering is using a moving average. One obvious difference between these two techniques is related to the weights assigned to the data. In contrast to moving average technique that assigns an equal weight to any observation periods, the HP Filter assigns different weights to different observation periods based on data frequency.

  4. Drehmann et al. (2011) has also utilized quarterly data, which will be helpful for future studies to develop finer grained picture of surges and reversals.

  5. The entire country list is given in Appendix 1

  6. See Bluedorn et al. (2013) for supporting arguments. Calvo (1998) uses changes in the current account and international reverses. While this is a less direct measure it allows him to use monthly data, whereas direct data on capital flows are usually quarterly or annual.

  7. Calvo (1998) uses changes in the current account and international reverses. While this is a less direct measure it allows him to use monthly data, whereas direct data on capital flows are usually quarterly or annual. A major disadvantage is that this measure only captures net flows.

  8. See Bluedorn et al. (2013), Calderon and Kubota (2013), Cavallo et al. (2013), Ghosh et al. (2014), Forbes and Warnock (2012), Janus and Riera-Crichton (2013), Kim et al. (2014), and Rothenberg and Warnock (2011).

  9. It should be explained that the standard terminology can be somewhat misleading. Gross flows separate out the behavior of domestic and foreign investors but the data for each is available only on net bases, i.e., total assets and total liabilities.

  10. Although theoretically it is possible to have an increasing ratio while inflows were actually decreasing, our sample indicates out of 622 cases only three of them related to this case.

  11. See Sula (2010) for a more compact version of this study.

  12. The rationale for not using a single year lag is that the capital inflows may increase suddenly in 1 year and continue to be very high for consecutive years without another abrupt increase. In such a case, if the surge is defined as a 1-year difference in capital inflows, the measure will only detect the beginning of the surge but will miss the continuation. The second criterion ensures that the level of inflows is large enough relative to GDP. This condition allows for filtering out the episodes of sudden capital flow recoveries from previous large outflows to small inflows in the current year.

  13. See Appendix B for the details

  14. Using different methods Agosin and Huaita (2011) also find increasing probability of reversals as surge lengths increase.

  15. The correlation between measures of currency crises and capital flow reversals is much lower that one might expect, see Efremidze et al. (2011).

  16. See Kim et al. (2014) for an attempt to this issue. Also see Agosin and Huaita (2012), Bluedorn et al. (2013), Caballero (2012), Cavallo et al. (2013), Forbes and Warnock (2012), Fureci et al. (2012), Molnar et al. (2013) and Sula (2010).

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Authors and Affiliations

  1. World Bank, Jakarta, Indonesia

    Masyita Crystallin

  2. Pepperdine University and Claremont Institute for Economic Policy Studies (CIEPS), Claremont, CA, USA

    Levan Efremidze

  3. Claremont Institute for Economic Policy Studies (CIEPS), Claremont, CA, USA

    Sungsoo Kim

  4. Bank of Indonesia and Claremont Institute for Economic Policy Studies (CIEPS), Claremont, CA, USA

    Wahyu Nugroho

  5. Department of Economics, Western Washington University and Claremont Institute for Economic Policy Studies (CIEPS), 516 High St., Bellingham, WA, 98225, USA

    Ozan Sula

  6. Claremont Graduate University and Claremont McKenna College and Director of Claremont Institute for Economic Policy Studies (CIEPS), Claremont, CA, USA

    Thomas Willett

Authors
  1. Masyita Crystallin
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  2. Levan Efremidze
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  3. Sungsoo Kim
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  4. Wahyu Nugroho
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  5. Ozan Sula
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  6. Thomas Willett
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Corresponding author

Correspondence to Ozan Sula.

Appendices

Appendices

1.1 Appendix 1

Table 7 List of countries
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1.2 Appendix 2 Correlations among Surge Methods

Table 8 Gross measure
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Table 9 Net measure
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1.3 Appendix 3

Table 10 Number of surge and sudden stops by year (gross measure)
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Table 11 Number of surge and capital flow reversals by year (net measure)
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1.4 Appendix 4

Table 12 Duration of surges and sudden stops (gross measure)
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Table 13 Duration of surges and capital flow reversals (net measure)
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Crystallin, M., Efremidze, L., Kim, S. et al. How Common are Capital Flows Surges? How They are Measured Matters -a Lot. Open Econ Rev 26, 663–682 (2015). https://doi.org/10.1007/s11079-015-9342-3

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