"Will international capital flows play a lead role in the next global crisis? This column summarises a new Bank of England study that provides simulations of gross and net capital flows between now and 2050. It shows that however great the challenges policymakers may now face, there are many more to come.
The experience of the past decade has demonstrated the challenges that international capital flows can pose for financial stability. Between 2002 and 2007, annual gross international capital flows rose from 5% to 17% of world GDP, and the network of cross-country financial linkages became increasingly complex (Hoggarth et al. 2010). Net international capital flows also rose sharply over this period, with global current-account imbalances (the sum of global deficits and surpluses) doubling from 3% to 6% of world GDP. The build-up of global imbalances was one of the preconditions for the recent financial crisis. And the increased interconnectedness between countries’ financial sectors associated with large gross flows created channels through which the initial shock could spread around the world.
As remarkable as the pre-crisis growth in international capital flows was, the collapse post-Lehman was yet more dramatic. Gross global cross-border capital flows plummeted to less than 1% of world GDP in 2008, with severe implications for both advanced economies – especially those with large, open financial sectors – and many emerging-market economies that had hitherto accessed funding from abroad. In these respects, the scale and volatility of international capital flows were crucial determinants of the depth and breadth of the crisis which followed Lehman Brothers’ demise..."
at http://www.voxeu.org/index.php?q=node/7452
The experience of the past decade has demonstrated the challenges that international capital flows can pose for financial stability. Between 2002 and 2007, annual gross international capital flows rose from 5% to 17% of world GDP, and the network of cross-country financial linkages became increasingly complex (Hoggarth et al. 2010). Net international capital flows also rose sharply over this period, with global current-account imbalances (the sum of global deficits and surpluses) doubling from 3% to 6% of world GDP. The build-up of global imbalances was one of the preconditions for the recent financial crisis. And the increased interconnectedness between countries’ financial sectors associated with large gross flows created channels through which the initial shock could spread around the world.
As remarkable as the pre-crisis growth in international capital flows was, the collapse post-Lehman was yet more dramatic. Gross global cross-border capital flows plummeted to less than 1% of world GDP in 2008, with severe implications for both advanced economies – especially those with large, open financial sectors – and many emerging-market economies that had hitherto accessed funding from abroad. In these respects, the scale and volatility of international capital flows were crucial determinants of the depth and breadth of the crisis which followed Lehman Brothers’ demise..."
at http://www.voxeu.org/index.php?q=node/7452
