How Does International Capital Flow?

Michael Kumhof, Andrej Sokol and Phurichai Rungcharoenkitkul

No 15526, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Understanding gross capital flows is increasingly viewed as crucial for both macroeconomic and financial stability policies, but theory is lagging behind many key policy debates. We fill this gap by developing a 2-country DSGE model that tracks domestic and cross-border gross positions between banks and households, with explicit settlement of all transactions through banks. We formalize the conceptual distinction between cross-border saving and financing, which often move in opposite directions in response to shocks. This matters for at least four policy debates. First, current accounts are poor indicators of financial vulnerability, because in a crisis creditors stop financing debt rather than current accounts, and because following a crisis current accounts are not the primary channel through which balance sheets adjust. Second, we re-interpret the global saving glut hypothesis by submitting that US households do not finance current account deficits with foreigners’ physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign. Third, Triffin’s current account dilemma is not in fact a dilemma, because the creation of additional US dollars requires dollar credit creation by domestic or foreign banks rather than US current account deficits. Finally, we show that the observed high correlation of gross capital inflows and outflows is overwhelmingly an automatic consequence of double entry bookkeeping, rather than the result of two separate and synchronized sets of economic decisions.

Keywords: Bank lending; International capital flows; Gross capital flows; Current account; Money creation; Sudden stops; Global saving glut; Triffin’s dilemma (search for similar items in EconPapers)
JEL-codes: E44 E51 F41 F44 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-fdg, nep-mac, 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:
Working Paper: How Does International Capital Flow? (2021)
Working Paper: How does international capital flow? (2020)
Working Paper: How does international capital flow? (2020)
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