Sudden stops of capital flows: Do foreign assets behave differently from foreign liabilities?. (September 2019) - Agosin, Manuel R.
Highlights: We study why sudden stops in inflows lead to sudden stops in the financial account. We use a multinomial logit model to determine the factors that distinguish these situations. We find that inflow sudden stops occur as often in developed countries as in emerging economies. In the former they do not lead to financial account sudden stops, but in the latter they often do. Abstract: We study the determinants of sudden stops in capital flows to emerging markets. Using gross international asset and liability flows (from the point of view of domestic residents), we identify three types of situations: countries that do not experience any type of sudden stops; those who experience a sudden stop in inflows (liabilities), but no sudden stop in their net financial account of the balance of payments; and countries who suffer a sudden stop in inflows and in their net financial account. Based on these three events, we estimate a multinomial logit model and obtain two important results. We find that developed countries have about the same probability of experiencing sudden stops in gross capital inflows as emerging economies. Moreover, the probability of experiencing a sudden stop in gross inflows that winds up becoming a sudden stop in the financial account is affected by the behavior of a country's international assets: countries whose agents possess assets abroad tend to repatriate them during periods of sudden stops in inflows, while the economies of countries whose agents do not possess foreign assets are much more sensitive to the behavior of foreign investors: a sudden stop in inflows can have very adverse effects on output and employment.