International Capital Flows – A Long Run View

Start of Project 04/2017
End of Project 12/2019

In a project with Carmen Reinhart and Vincent Reinhart we ask: How do international capital flows affect global financial stability? To address this question we create a new, extensive database on international capital flows over the past 200 years by combining country-level data on the current account, gold, FX reserves and debt issuance abroad. We show that cross-border financial flows from financial centers to the periphery are cyclical. Moreover, we find that that capital flow cycles are connected to the occurrence of financial crises, particularly sovereign defaults. When capital exports from financial centers collapse, periphery countries often face financial turmoil and debt distress. Preliminary results of this project were presented at the Annual IMF Research Conference  in November 2017. The database and analysis is in progress and will hopefully be publicly available by 2019.

A second project in this broader research agenda studies one type of international capital flows in greater detail - sovereign lending across borders. We ask: How risky is sovereign debt for investors and financial stability? And how do creditors fare in sovereign debt markets in the very long run? To answer these questions, we study investor profits and losses in sovereign bonds over the past 200 years and gather an extensive database of bond prices and bond losses (haircuts) on a micro level. The result will be the most ambitious dataset of sovereign external lending to date, which will allow us to evaluate the risks and opportunities in this market in more rigorous way than ever before. We aim for a first draft in late 2018.