A User's Guide to International Capital Flows

This note provides a description of international flows and positions data, a way to identify extreme capital flow episodes (such as surges and stops), and a straightforward technique to predict whether a country should receive more or fewer portfolio inflows in the coming year based on a notion of benchmark inflows. Excerpt UVA-GEM-0171 Jan. 23, 2019 A User's Guide to International Capital Flows In some ways, capital flows are like oxygen: too little or too much can be dangerous. Surges of capital inflows are often followed by crises. Capital flows in, at first funding worthy projects but later enabling questionable ones, and all is well as long as capital continues to flow in and the recipient economy remains buoyant. But when the tide turns and the capital inflow surge turns into a sudden stop, questionable projects are exposed, defaults increase, and the economy suffers. It need not be this way—not all surges end in stops—but the specter of a virtuous cycle turning vicious looms over international capital flows. This note is intended to get the reader from 0 to 60 in just 10 pages. For those unaccustomed to capital flows, it begins with a description of balance of payments (BOP) and international investment position (IIP) data. It then proceeds to measures of extreme capital flows (such as surges and stops), before ending with new thinking on the benchmark amount of inflows a country can expect to receive. BOP and IIP Data: The Basics . . .