Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Dallas
Globalization Institute Working Papers
The cyclicality of (bilateral) capital inflows and outflows
J. Scott Davis
Abstract

Recent research has shown that gross capital inflows and outflows are positively correlated and highly procyclical. This poses a puzzle since most theory predicts that capital inflows and outflows should be negatively correlated, and while capital inflows should be procyclical, capital outflows should be countercyclical. This previous work has examined the behavior of aggregate capital inflows and outflows (capital flows between a country and the rest of the world). This paper shows that bilateral capital inflows and outflows (flows between a pair of countries) are also positively correlated and strongly procyclical. This empirical finding poses a new puzzle. The data suggests that any model that can explain capital flows at the bilateral level needs to rely on market incompleteness and non-diversification. In addition, the data suggests that this positive correlation and procyclicality is largely the feature of crisis episodes. After controlling for crisis episodes, we find that bilateral capital flows move positively with GDP in the country receiving the capital and co-move negatively in the country sending the capital.


Download Full text
Cite this item
J. Scott Davis, The cyclicality of (bilateral) capital inflows and outflows, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 247, 01 Aug 2015.
More from this series
JEL Classification:
Subject headings:
DOI: 10.24149/gwp247
For corrections, contact Amy Chapman ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal