## Do Some Forms of Financial Flows Help Protect From Sudden Stops?

_IMF Working Papers, September 1, 2006_

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## Bibliographic details
- Authors: Paolo Mauro, Andrei A Levchenko
- Published: September 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864625.001

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### 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).*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/do-some-forms-of-financial-flows-help-protect-from-sudden-stops-19540_