Do Some Forms of Financial Flows Help Protect From Sudden Stops?
IMF Working Papers, September 1, 2006
Source details
- Canonical URL
- Do Some Forms of Financial Flows Help Protect From Sudden Stops?
Other formats
Bibliographic details
- Authors: Paolo Mauro, Andrei A Levchenko
- Published: September 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864625.001
Overview
- Research question: whether some forms of financial flows offer better crisis protection than others.
- Sample and period: a large panel of advanced, emerging, and developing countries during 1970-2003.
- Types of flows analyzed: 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.
Key findings on behavior of flow types
- Differences across types of flows are limited with respect to:
- volatility,
- persistence,
- cross-country comovement,
- correlation with growth at home or in the world economy.
- FDI is found to be the least volatile form of financial flows when taking into account the average size of net or gross flows.
- During normal periods:
- portfolio equity and portfolio debt show behavior broadly similar to other flow types in many dimensions.
Behavior during "sudden stops"
- Definition used: drops in total net financial inflows by more than 5 percentage points of GDP compared with the previous year.
- Observed patterns in such episodes:
- FDI is remarkably stable.
- Portfolio equity also seems to play a limited role (limited change).
- Portfolio debt experiences a reversal, though it recovers relatively quickly.
- Other flows (including bank loans and trade credit) experience severe drops and remain depressed for a few years.
Implications and interpretation
- The empirical results are consistent with conventional wisdom that FDI is the most stable form of financial inflow relative to its size.
- Different flow types exhibit markedly different dynamics in crisis episodes, with other flows (bank lending, trade credit) being most vulnerable and persistent in their decline.
Data scope and metadata
- Period covered: 1970-2003.
- Pages: 23.
- Publication date: September 1, 2006.
- Series and identifiers:
- Working Paper No. 2006/202
- Volume: 2006
- Issue: 202
- DOI: https://doi.org/10.5089/9781451864625.001
Source: IMF Working Paper "Do Some Forms of Financial Flows Help Protect From Sudden Stops?" by Paolo Mauro and Andrei A Levchenko (September 1, 2006).