Globalization and the increasing correlation between capital inflows and outflows

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Abstract

The correlation between capital inflows and outflows has increased substantially over time in a sample of 127 advanced and developing countries. We provide evidence that this is a result of an increase in financial globalization (stock of external assets and liabilities). This dominates the effect of an increase in trade globalization (exports plus imports), which reduces the correlation between capital inflows and outflows. In the context of a two-country model with 8 shocks we show that the theoretical impact of financial and trade globalization on the correlation between capital inflows and outflows is consistent with the data.

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Davis, J. S., & Van Wincoop, E. (2018). Globalization and the increasing correlation between capital inflows and outflows. Journal of Monetary Economics, 100, 83–100. https://doi.org/10.1016/j.jmoneco.2018.07.009

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