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International reserves and gross capital flow dynamics

Enrique Alberola-Ila, Aitor Erce and Jose Maria Serena Garralda

No 512, BIS Working Papers from Bank for International Settlements

Abstract: This paper explores the role of international reserves as a stabiliser 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 behaviour of gross capital flows. We analyse an extensive cross-country quarterly database, comprising 63 countries for the period 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)
Pages: 29 pages
Date: 2015-10
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: International reserves and gross capital flows dynamics (2016) Downloads
Working Paper: International Reserves and Gross Capital Flows Dynamics (2014) Downloads
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