Cyclical pattern in international financial flows to the semi-periphery

This study reveals that medium-term economic cycles in center countries drive systemic shifts in short-term financial flows to semi-periphery economies. Our theoretical model demonstrates that center countries’ economic downturns (upturns) can lead to increased (decreased) short-term net financial inflows to semi-periphery countries as investors seek alternative opportunities (return to center markets). However, this substitution effect competes with a volume effect resulting from changes in total global investment.

Confirming the importance of the substitution effect, panel data analysis for 1970–2020 establishes that portfolio investments increase when center economies decline. Additional findings show that: (1) foreign direct investments are less sensitive to these cycles than portfolio flows; (2) periphery countries tend to follow a procyclical pattern; and (3) stronger financial and trade ties with center economies amplify the substitution effect.