International reserves and gross capital flows dynamics

Enrique Alberola, Aitor Erce and Jose Maria Serena Garralda

Journal of International Money and Finance, 2016, vol. 60, issue C, 151-171

Abstract: This paper explores the role of international reserves as a stabilizer of international capital flows, in particular during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database – 63 countries, 1991–2010 – using standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves act as a buffer during financial stress. A robust result of the analysis is that international reserves facilitate financial disinvestment overseas by residents – a fall in capital outflows. This partially offsets the drop in foreign capital inflows observed in such periods. For the whole sample, we also find that larger stocks of international reserves are linked to higher gross inflows and lower gross outflows. These results, which challenge current approaches to measuring reserve adequacy, call for refining such tools to better account for the role of resident investors.

Keywords: Gross capital flows; International reserves; Systemic crises; Capital retrenchment (search for similar items in EconPapers)
JEL-codes: F21 F32 F33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (50)

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Related works:
Working Paper: International reserves and gross capital flow dynamics (2015)
Working Paper: International Reserves and Gross Capital Flows Dynamics (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:60:y:2016:i:c:p:151-171

DOI: 10.1016/j.jimonfin.2015.09.003

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