This article examines the new trends in research on capital flows fueled by the 2007–2009 Global Crisis. Previous studies on capital flows focused on current account imbalances and net capital flows. The Global Crisis changed that. The onset of this crisis was preceded by a dramatic increase in gross financial flows while net capital flows remained mostly subdued. The attention in academia zoomed in on gross inflows and outflows with special attention to cross-border banking flows before the crisis erupted and the shift towards corporate bond issuance in its aftermath. The boom and bust in capital flows around the Global Crisis also stimulated a new area of research: capturing the “global factor.” This research adopts two different approaches. The traditional literature on the push–pull factors, which before the crisis was mostly focused on monetary policy in the financial center as the “push factor,” started to explore what other factors contribute to the co-movement of capital flows as well as to amplify the role of monetary policy in the financial center on capital flows. This new research focuses on global banks’ leverage, risk appetite, and global uncertainty. Since the “global factor” is not known, a second branch of the literature has captured this factor indirectly using dynamic common factors extracted from actual capital flows or movements in asset prices.
Graciela Laura Kaminsky
Yanshuo Chen and Galina Hale
International capital flows have challenged economists’ models for decades. They exhibit a number of patterns that standard economic theories have struggled to explain. Over time, global capital flows go through boom and bust cycles, sudden stops, and unprecedented bonanzas. Determinants of capital flows include “pull factors,” recipient countries’ economic and structural characteristics, and “push factors” or “global factors,” which mostly depend on the global financial cycle and U.S. monetary policy. The relative importance of global factors has increased since the early 2000s. The rise in international capital flows that has accompanied the wave of globalization in the early 21st century has helped to deliver crucial capital resources that facilitated development of many economies and helped transmit technologies across borders. On the flip side, international capital flows also increased transmission of financial shocks and policy changes across countries, most prominently experienced during the global financial crisis of 2008–2009. On balance, is it beneficial for small open economies to allow for free capital flows? Mainstream economists’ and policymakers’ answer to this question has evolved from an unequivocal “yes” to a much more nuanced view.