Sudden stops of capital flows: do foreign assets behave differently from foreign liabilities?

Abstract

We study the determinants of sudden stops in capital ows to emerging markets. Using gross international asset and liability ows (from the point of view of domestic residents), we identify three types of situations: (1) countries that do not experience any type of sudden stops; (2) those who experience a sudden stop in in ows (liabilities), but no sudden stop in their net nancial account of the balance of pay-ments; and (3) countries who su er a sudden stop in in ows and in their net nancial account. With these three events and a series of control variables, we estimate a multinomial logit model. The most important results are two. In the rst place, we nd that developed countries have about the same probability of experiencing sudden stops in gross capital in ows as emerging economies. Secondly, the probability of experiencing a sudden stop in gross in ows that winds up becoming a sudden stop in the nancial account is a ected 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 in-ows, while countries whose agents invest domestically are much more sensitive to the behavior of foreign investors and their humors. We also show that the correlation coe cient between changes in in ows and out ows is itself highly correlated with a whole variety of indica-tors of domestic nancial depth, allowing us to interpret it as a proxy for nancial development.