Which Net Capital Flows Matter?

This paper classifies extreme net capital flows into four episodes and analyzes macroeconomic impacts of each episode. Incorporating measures of drastic capital flow movements in existing literatures, we develop a new classification of extreme net capital flows in terms of 1) whether net capital flows rise or fall, and 2) whether the episode is driven by asset flows or liability flows. First, we find all types of episodes increased drastically in the 2000s by investigating a newly constructed international panel data that include 44 countries (22 advanced, and 22 emerging market economies) from 1980 to 2008. Second, when we examine macroeconomic impacts of different types of net capital flow episodes by using panel VAR models, liability-flow driven episodes have significant impacts on macroeconomic variables than asset-flow driven episodes. Third, we study the relationship between the abrupt changes of net capital flows and banking crises and show that only drastic positive net capital flows driven by liability flows are associated with a higher probability of banking crises in the 2000s. The results suggest that the detailed classification of extreme net capital flow movements provides insights into its macroeconomic impacts and policy implementations