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The Pro-Cyclicality of Cross-Border Capital Flow: A Structural Perspective

【Authors】
SUN Tianqi, WANG Xiaoxiao & SHANG Xinxin
【WorkUnit】
SUN Tianqi (Financial Stability Bureau, Peoples Bank of China, 100032)WANG Xiaoxiao (Institute of Economics and Finance, Industrial Securities, 200135; Institute of Finance, People's Bank of China, 100032)SHANG Xinxin (Foreign Exchange Research Center, State Administration of Foreign Exchange, 100048; Institute of Finance, People's Bank of China, 100032)
【Abstract】

Using 34 major countries' quarterly capital flow data from 1999 to 2017, this paper investigates the effect of domestic economic cycle and the global financial cycle on cross-border capital flow by category and sector from a structural perspective. This study yields three main findings. (1) The gross cross-border capital flow changes along with the domestic economic cycle and the global financial cycle. When GDP growth rises, net capital flow also increases; when global financial risks increase, net flow decreases. Such a pro-cyclical pattern gets clearer when gross capital flow is divided into the inflow and outflow. (2) By category, direct investment is not significantly affected by domestic economic cycle and global financial cycle, meaning it shows no pro-cyclical effect. The pro-cyclicality of other investments appears to be highly similar to that of gross capital flow. Moreover, portfolio investments are also affected by global financial cycle. When the global financial risks increase, portfolio investment inflow to developed countries increases but decreases to developing countries. (3) By sector, other investments by banks and the corporate sector show a significant pro-cyclical pattern, but not those by governments and central banks. The risk aversion effect of cross-border capital flow is mainly driven by the corporate sector. According to the above results, it is suggested that the risk management of cross-border capital flow may be more effective by focusing on portfolio investments and other investments. Developing countries should pay particular attention to guarding against cross-border capital outflows from portfolio investments caused by external shocks in times of high global risks.

JEL:F30, F32

【KeyWords】
Capital Flows, Pro-Cyclicality, Domestic Economic Cycle, Global Financial Cycle