OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
- Forthcoming titles
- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
International Capital Mobility and Financial Fragility - Part 4. Which Structural Policies Stabilise Capital Flows When Investors Suddenly Change Their Mind?
Evidence from Bilateral Bank Data
The global financial crisis of 2007-09 and the ensuing sovereign debt crisis in Europe provide
evidence that portfolio rebalancing of financial investors can contribute to spread financial turmoil across
countries. Rebalancing of portfolios, in turn, may be driven by the need to meet liquidity or capital
requirements, or by sudden changes in investor sentiment. This paper tests explicitly for the change-insentiment
channel of financial contagion. Using bilateral bank data and an instrumental variables technique
that allows focusing on changes in investors’ country assessments that are unrelated to fundamentals,
changes in investor sentiment are indeed found to drive capital flows. Sentiment-driven capital flows are
found to be smaller in countries with a tougher regulatory stance, such as stricter banking supervision or
enhanced financial transparency.
JEL:
G11: Financial Economics / General Financial Markets / Portfolio Choice; Investment Decisions;
F21: International Economics / International Factor Movements and International Business / International Investment; Long-Term Capital Movements;
G18: Financial Economics / General Financial Markets / General Financial Markets: Government Policy and Regulation
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