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

23 Pages Posted: 3 Oct 2006

See all articles by Andrei A. Levchenko

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Paolo Mauro

International Monetary Fund (IMF)

Date Written: September 2006

Abstract

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.

Keywords: capital flows, crises, foreign direct investment

JEL Classification: F21, F33, F36

Suggested Citation

Levchenko, Andrei A. and Mauro, Paolo, Do Some Forms of Financial Flows Help Protect from Sudden Stops? (September 2006). IMF Working Paper No. 06/202, Available at SSRN: https://ssrn.com/abstract=934461

Andrei A. Levchenko (Contact Author)

University of Michigan - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

HOME PAGE: http://alevchenko.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Paolo Mauro

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
147
Abstract Views
1,390
Rank
358,685
PlumX Metrics