International Capital Flow Pressures

This paper presents a new measure of capital flow pressures in the form of a recast ExchangeMarket Pressure index. The measure captures pressures that materialize in actual internationalcapital flows as well as pressures that result in exchange rate adjustments. The formulation istheory-based, relying on balance of payments equilibrium conditions and international assetportfolio considerations. Based on the modified exchange market pressure index, the paperalso proposes the Global Risk Response Index, which reflects the country-specific sensitivityof capital flow pressures to measures of global risk aversion. For a large sample of countriesover time, we demonstrate time variation in the effects of global risk on exchange marketpressures, the evolving importance of the global factor across types of countries, and thechanging risk-on or risk-off status of currencies