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Do Some Forms of Financial Flows Help Protect from Sudden Stops?

Author/Editor: Levchenko, Andrei A. | Mauro, Paolo
Authorized for Distribution: September 1, 2006
Electronic Access: Free Full Text (PDF file size is 237KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: There is a debate on whether some forms of financial flows offer better crisis protection than others. Using a large panel of advanced, emerging, and developing countries during 1970-2003, this paper analyzes the behavior of various types of flows: foreign direct investment (FDI), portfolio equity investment, portfolio debt investment, other flows to the official sector, other flows to banks, and other flows to the non-bank private sector. Differences across types of flows are limited with respect to volatility, persistence, cross-country comovement, and correlation with growth at home or in the world economy. However, consistent with conventional wisdom, FDI is found to be the least volatile form of financial flows when taking into account the average size of net or gross flows. The differences are striking during "sudden stops" in financial flows (defined as drops in total net financial inflows by more than 5 percentage points of GDP compared with the previous year): in such episodes, FDI is remarkably stable; portfolio equity also seems to play a limited role; portfolio debt experiences a reversal, though it recovers relatively quickly; and other flows (including bank loans and trade credit) experience severe drops and remain depressed for a few years.
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Series: Working Paper No. 06/202
Subject(s): Capital flows | Foreign direct investment
Author's keyword(s): Capital flows | crises | foreign direct investment
    Published:   September 1, 2006        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2006202   Pages:   21
    Price:   US$18.00 (Academic Rate: US$18.00 )
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