Globalization and the Increasing Correlation between Capital Inflows and Outflows

35 Pages Posted: 17 Aug 2017

See all articles by Scott Davis

Scott Davis

Federal Reserve Banks - Federal Reserve Bank of Dallas

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2017

Abstract

We document that the correlation between capital inflows and outflows has increased substantially over time in a sample of 128 advanced and developing countries. We provide evidence that this is a result of an increase in financial globalization (stock of external assets and liabilities). This dominates the effect of an increase in trade globalization (exports plus imports), which reduces the correlation between capital inflows and outflows. In the context of a two-country model with 14 shocks we show that the theoretical impact of financial and trade globalization on the correlation between capital inflows and outflows is consistent with the data.

Suggested Citation

Davis, Scott and van Wincoop, Eric, Globalization and the Increasing Correlation between Capital Inflows and Outflows (August 2017). NBER Working Paper No. w23671, Available at SSRN: https://ssrn.com/abstract=3018330

Scott Davis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

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Eric Van Wincoop

University of Virginia - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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