Leverage Cycles, Growth Shocks, and Sudden Stops in Capital Inflows

Abstract

Using a quarterly panel of 98 advanced as well as emerging and developing countries from 1990 to 2018, this paper shows that domestic variables are significantly related to the probability of incurring sharp reversals in capital inflows controlling for global push factors. In particular, negative growth shocks combined with high levels of leverage in the domestic private sector are a significant determinant of sudden stops. This is in line with real business cycle models including an occasionally binding credit constraint and income trend shocks.

Keywords: international capital flows, Sudden stops, Financial Stability