## 1. Economies by Group ## Source details **Canonical URL:** [1. Economies by Group](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06202.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06202.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06202.pdf.json) --- ### I. Introduction and objective - Objective: provide a detailed, comprehensive, and up-to-date empirical analysis of the behavior of various types of international financial flows (1970–2003), with special focus on episodes of “sudden stop” defined as reversals in total financial flows by more than 5 percentage points of GDP compared with the previous year. - Distinction emphasized between two mechanisms: - Payments/cash-flow properties (equity-like finance reduces payments when performance is worse). - Behavior/volatility of flow types (stability, reversals, and role in crises). - Core findings: - Various types of financial flows do not differ significantly in persistence, procyclicality, responsiveness to G-7 growth or US interest rates, or comovement across emerging markets (consistent with Claessens and others (1995)). - FDI is the least volatile form of financial flows when normalized by size and accounts for a large share of net flows to emerging and developing countries. - During sudden stops, FDI remains remarkably stable and plays essentially no role; portfolio equity plays a limited role; portfolio debt reverses but recovers relatively quickly; bank lending flows and official flows drop severely and remain depressed for several years. ### II. Data, definitions, and methodology - Data scope: - Annual data 1970–2003 on the financial account and six subcomponents: (i) Foreign Direct Investment (FDI); (ii) Portfolio Debt Investment (PDI); (iii) Portfolio Equity Investment (PEI); (iv) Other Net Flows to the Domestic Official Sector; (v) Other Net Flows to Domestic Banks; (vi) Other Net Flows to the Non-Bank Private Sector. - All flows are net, reported in current U.S. dollars, drawn from the IMF’s Balance of Payments database (Analytic Presentation, 5th edition). - Flows exclude Exceptional Financing, Use of IMF credit, and Changes in Reserves. - Flows normalized by GDP in current U.S. dollars. - Full sample includes 153 countries; summary statistics based on annual data for 1970–2003; main results hold for subperiod 1990–2003. - Sudden stop definition used: worsening in the financial account balance by more than 5 percentage points of GDP compared with the previous year. - Robustness: alternative thresholds and definitions were used for checks. ### III. Summary statistics and key empirical findings - Average net flows (cross-country median by group): - Developing countries had the largest net inflows, followed by emerging markets, then advanced countries. - Emerging markets received net FDI inflows averaging about 1.3 percentage points of GDP yearly. - Developing countries received net FDI inflows averaging about 2.3 percentage points of GDP yearly. - Volatility (standard deviation of net flows, median across countries, 1970–2003): - Financial account balance standard deviation: advanced countries 2.9 percentage points of GDP; emerging markets and developing countries 4.5 percentage points of GDP. - FDI is the least volatile flow when normalized by size (coefficient of variation near 1 for emerging and developing countries), compared with coefficients of variation of about 2–3 for PDI and PEI and about 5–7 for other flows (official, banks, non-bank private). - Correlations with macro variables (median correlations): - Financial flows mildly procyclical with domestic GDP growth in emerging market and developing countries. - FDI correlation with domestic growth in developing countries: 0.2. - PEI correlation with G-7 growth: emerging markets 0.1; developing countries 0.2. - U.S. 1-year T-bill correlation with inflows into advanced countries: 0.2; virtually uncorrelated with emerging and developing country financial accounts. - FDI correlation with the U.S. 1-year T-bill: emerging markets -0.3; developing countries -0.16. - Different flow types are uncorrelated or weakly negatively correlated with each other. - Persistence (AR(1) pooled estimates, fixed effects): - Financial account AR(1): advanced countries 0.7; emerging markets 0.5; developing countries 0.5. - Across flows in advanced countries, AR(1) coefficients range 0.3–0.4. - For emerging markets: FDI AR(1) 0.5; PDI AR(1) ~0.0. - For developing countries: FDI AR(1) 0.35; PDI/PEI/other flows between 0.2–0.5. - Comovement (first principal component share of variation): - For total financial flows, first principal component accounts for about 25 to 30 percent of variation in financial flows across developed and developing countries. - No pronounced differences across types of flow in the importance of the common component; FDI and PEI show relatively large common components in advanced countries; FDI largest common component in emerging markets. ### IV. Behavior during sudden stops - Sample and event construction: - 33 sudden stop episodes in 1980–2002 with all six subcomponents available for at least a 5-year window around the stop; 85 sudden stops for which some flow-type data are available. - Event-time analysis: t = 0 is year of sudden stop; cross-episode averages and standard errors computed after regressing flows on country and year dummies. - Core findings in “sudden stop time”: - FDI remains strikingly stable during sudden stops and plays essentially no role in the reversal of total financial inflows, despite being a large share of total flows. - Portfolio equity plays a limited role in sudden stops. - Portfolio debt experiences reversals but tends to recover relatively quickly after sudden stops. - Other net flows (to the official sector, to banks, and to the non-bank private sector) experience severe drops and remain depressed for several years after sudden stops; these account for much of the sudden-stop reversal. - Quarterly-frequency evidence around the August 1998 Russia/LTCM crisis for heavily affected emerging market countries confirms the same pattern: large worsening of financial accounts driven by portfolio debt, portfolio equity, and other flows; FDI remained stable. - Causality and timing evidence: - For essentially all sudden stop episodes with available monthly forecast data, there was no worsening in Consensus Forecast economic growth for the following year (or the same year) in the same month as the sudden stop; forecast growth often began falling only after the crisis erupted. - This pattern reduces the likelihood that sudden stops were primarily caused by prior worsening in country-specific growth expectations. - Fire-sale FDI considerations: - Evidence of “fire-sale” FDI (foreign purchases of distressed domestic firms post-crisis) is limited: FDI rose after sudden stops in Korea and Thailand, but in most other cases FDI remained stable. - Authors note that even if domestic agents incur capital losses when selling assets in fire-sales, foreign investors who held FDI prior to the crisis would also incur losses; the paper focuses on flow behavior rather than returns on stocks. ### V. Conclusions and suggested extensions - Main conclusions: - Differences across flow types are limited in volatility, persistence, cross-country comovement, and correlation with domestic or world growth. - FDI is the least volatile flow when normalized by average size and is remarkably impervious to sudden stops; non-FDI flows—particularly bank flows, trade credits, and other investments—account for sudden stops. - Suggested extensions: - Repeat analysis controlling for determinants of financial flows and focus on residuals from panel regressions with alternative explanatory variables (macroeconomic variables or growth forecasts). - Analyze behavior of returns on different types of flows (e.g., whether returns on equity-like liabilities fall more in sudden stops than debt-like liabilities), to quantify risk-sharing benefits of equity-like finance. - Investigate whether sudden stops (and specifically non-FDI sudden stops) have large adverse impacts on deviations of output from forecast output—providing evidence on causality from capital flows to output. *Source: _wp06202 - IMF staff paper (1970–2003 sample) summarized from the provided content unit.* ### 1. Economies by Group.................................................................................................. ### 1. Economies by Group ### Section listings - 1. Economies by Group.............................................................................................................6 - 2. Financial Account and its Sub-Components, 1970–2003.....................................................7 - 3. Number of Large Worsenings During Sudden Stops, by Flow Type .................................13 ### Figures - Figure 1. Composition of Financial Flows Around All Sudden Stops, 1980–2004...........................14 - Figure 2. Composition of Financial Flows Around the August 1998 Russia/LTCM Crisis ..............15 - Figure 3. Consensus Forecasts for the Following Year (Real GDP Growth in Percent) ...................16 *Source: _wp06202 - 1. Economies by Group..................................................................................................* ### References.............................................................................................................. ### _wp06202 - References ### I. Introduction and objective - Objective: provide a detailed, comprehensive, and up-to-date empirical analysis of the behavior of various types of international financial flows (1970–2003), with special focus on episodes of “sudden stop” defined as reversals in total financial flows by more than 5 percentage points of GDP compared with the previous year. - Distinction emphasized between two mechanisms: - Payments/cash-flow properties (equity-like finance reduces payments when performance is worse). - Behavior/volatility of flow types (stability, reversals, and role in crises). - Core finding summary: - Various types of financial flows do not differ significantly in persistence, procyclicality, responsiveness to G-7 growth or US interest rates, or comovement across emerging markets (consistent with Claessens and others (1995)). - FDI is the least volatile form of financial flows when normalized by size and accounts for a large share of net flows to emerging and developing countries. - During sudden stops, FDI remains remarkably stable and plays essentially no role; portfolio equity plays a limited role; portfolio debt reverses but recovers relatively quickly; bank lending flows and official flows drop severely and remain depressed for several years. ### II. Data, definitions, and methodology - Data scope: - Annual data 1970–2003 on the financial account and six subcomponents: (i) Foreign Direct Investment (FDI); (ii) Portfolio Debt Investment (PDI); (iii) Portfolio Equity Investment (PEI); (iv) Other Net Flows to the Domestic Official Sector; (v) Other Net Flows to Domestic Banks; (vi) Other Net Flows to the Non-Bank Private Sector. - All flows are net, reported in current U.S. dollars, drawn from the IMF’s Balance of Payments database (Analytic Presentation, 5th edition). - Flows exclude Exceptional Financing, Use of IMF credit, and Changes in Reserves. - Flows normalized by GDP in current U.S. dollars. - Full sample includes 153 countries; summary statistics based on annual data for 1970–2003; main results hold for subperiod 1990–2003. - Sudden stop definition used: worsening in the financial account balance by more than 5 percentage points of GDP compared with the previous year. Robustness checks performed with alternative thresholds and definitions. ### III. Summary statistics and key empirical findings - Average net flows (cross-country median by group, financial account and FDI highlights): - Developing countries had the largest net inflows, followed by emerging markets, then advanced countries. - Emerging markets received net FDI inflows averaging about 1.3 percentage points of GDP yearly. - Developing countries received net FDI inflows averaging about 2.3 percentage points of GDP yearly. - Volatility (standard deviation of net flows, median across countries, 1970–2003): - Financial account balance standard deviation: advanced countries 2.9 percentage points of GDP; emerging markets and developing countries 4.5 percentage points of GDP. - FDI is the least volatile flow when normalized by size (coefficient of variation near 1 for emerging and developing countries), compared with coefficients of variation of about 2–3 for PDI and PEI and about 5–7 for other flows (official, banks, non-bank private). - Correlations with macro variables (median correlations reported): - Financial flows mildly procyclical with domestic GDP growth in emerging market and developing countries. - FDI correlation with domestic growth in developing countries: 0.2. - PEI correlation with G-7 growth: emerging markets 0.1; developing countries 0.2. - U.S. 1-year T-bill correlation with inflows into advanced countries: 0.2; virtually uncorrelated with emerging and developing country financial accounts. - FDI correlation with the U.S. 1-year T-bill: emerging markets -0.3; developing countries -0.16. - Different flow types are uncorrelated or weakly negatively correlated with each other (consistent with potential substitution or reclassification). - Persistence (AR(1) pooled estimates, fixed effects): - Financial account AR(1): advanced countries 0.7; emerging markets 0.5; developing countries 0.5. - Across flows in advanced countries, AR(1) coefficients range 0.3–0.4. - For emerging markets: FDI AR(1) 0.5; PDI AR(1) ~0.0. - For developing countries: FDI AR(1) 0.35; PDI/PEI/other flows between 0.2–0.5. - Comovement (first principal component share of variation): - For total financial flows, first principal component accounts for about 25 to 30 percent of variation in financial flows across developed and developing countries. - No pronounced differences across types of flow in the importance of the common component; FDI and PEI show relatively large common components in advanced countries; FDI largest common component in emerging markets. ### IV. Behavior during sudden stops - Sample and event construction: - 33 sudden stop episodes in 1980–2002 with all six subcomponents available for at least a 5-year window around the stop; 85 sudden stops for which some flow-type data are available. - Event-time analysis: t = 0 is year of sudden stop; cross-episode averages and standard errors computed after regressing flows on country and year dummies. - Core findings in “sudden stop time”: - FDI remains strikingly stable during sudden stops and plays essentially no role in the reversal of total financial inflows, despite being a large share of total flows. - Portfolio equity plays a limited role in sudden stops. - Portfolio debt experiences reversals but tends to recover relatively quickly after sudden stops. - Other net flows (to the official sector, to banks, and to the non-bank private sector) experience severe drops and remain depressed for several years after sudden stops; these account for much of the sudden-stop reversal. - Quarterly-frequency evidence around the August 1998 Russia/LTCM crisis for heavily affected emerging market countries confirms the same pattern: large worsening of financial accounts driven by portfolio debt, portfolio equity, and other flows; FDI remained stable. - Causality and timing evidence: - For essentially all sudden stop episodes with available monthly forecast data, there was no worsening in Consensus Forecast economic growth for the following year (or the same year) in the same month as the sudden stop; forecast growth often began falling only after the crisis erupted. - This pattern reduces the likelihood that sudden stops were primarily caused by prior worsening in country-specific growth expectations. - Fire-sale FDI considerations: - Evidence of “fire-sale” FDI (foreign purchases of distressed domestic firms post-crisis) is limited: FDI rose after sudden stops in Korea and Thailand, but in most other cases FDI remained stable. - Authors note that even if domestic agents incur capital losses when selling assets in fire-sales, foreign investors who held FDI prior to the crisis would also incur losses; the paper focuses on flow behavior rather than returns on stocks. ### V. Conclusions and suggested extensions - Main conclusions: - Differences across flow types are limited in volatility, persistence, cross-country comovement, and correlation with domestic or world growth. - FDI is the least volatile flow when normalized by average size and is remarkably impervious to sudden stops; non-FDI flows—particularly bank flows, trade credits, and other investments—account for sudden stops. - Suggested extensions (three highlighted): - Repeat analysis controlling for determinants of financial flows and focus on residuals from panel regressions with alternative explanatory variables (macroeconomic variables or growth forecasts). - Analyze behavior of returns on different types of flows (e.g., whether returns on equity-like liabilities fall more in sudden stops than debt-like liabilities), to quantify risk-sharing benefits of equity-like finance. - Investigate whether sudden stops (and specifically non-FDI sudden stops) have large adverse impacts on deviations of output from forecast output—providing evidence on causality from capital flows to output. *Source: IMF staff paper (1970–2003 sample) summarized from the provided content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06202.pdf_