International Gross Capital Flows: A New Measure and Application to a Global Panel

Abstract

Macroeconomic studies of international capital flows have focused on (i) net capital flows across countries, (ii) gross capital flows or (iii) more rarely gross inflows (outflows) computed as the sum of foreign (domestic) acquisitions of domestic (foreign) assets in balance of payments data. In this paper, we argue that more information than embodied in existing measures is readily available. Thus, we decompose a country’s net capital inflow into four instead of the standard two inflow/outflow components. We, then, support the practical importance of four-way decompositions by showing that they explain six financial crises and predict sudden stops better than standard measures of gross capital flows. Finally, we note that what the literature’s terms gross capital “inflows” (“outflows”) really measure net acquisitions of international assets by foreign (domestic) residents and that the actual cross-border flows implied by balance of payments data are larger.

Keywords: gross international capital flows, balance of payments, financial openness

JEL Classification: F21, F32, F36, G15