Capital Flow Surges And Sudden Stops

Emerging market economies and developing countries have witnessed two tides of capital inflows ever since the 1990s. The first one reached its peak in 1997 and ended up with the South-east Asia Crisis. The second one was ended in 2008 when the Subprime Crisis erupted in the U.S. International capital flow has long been the main issue in the field of international finance and sudden stop has been studied extensively since it was put forward after the South-east Asia Crisis. The Subprime Crisis turned the interest of scholars to sudden stop again. History tells us that most EMEs which suffered sudden stops were recipients of large capital inflows. It may be a kind of natural process but actually there exists a mechanism in depth. This paper try to find out the way in which surges in capital inflows increase the probability of sudden stop based on existing studies and probit models using a panel data of 35 EMEs in 1990-2012. The empirical analysis shows the financial system in EMEs plays an important role in intermediation between surges and stops. When surges interact with distorted financial system, e.g. boom in bank credit and over expansion of capital market, the probability of sudden stop will increase. The results also show that domestic and global GDP growth rate, global risk and liquidity, contagions affect sudden stop significantly and FPI and FOI are more reversible than FDI. Finally, several policy suggestions are made. First, intensify the management on capital inflows to reduce excess cross-border liquidity. Second, improve the quality of domestic financial system to make a sound foundation to capital account liberalization. Third, strive for an international framework of cooperation.