International Financial Flows in the New Normal: Key Patterns (and Why We Should Care)

This policy brief documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. Specifically, we compare the period since 2012 with the pre-crisis period and highlight four key stylized facts. First, the “Great Retrenchment” that took place during the crisis has proved very persistent, and world financial flows are now down to half their pre-crisis levels. Second, this fall can predominantly be related to advanced economies, especially those in Western Europe, while emerging markets, except Eastern European countries, have been less severely affected until recently. Third, the global patterns of net flows have also recorded significant changes. Overall, net flows have fallen substantially relative to the years preceding the sudden stop, which is to some extent an expression of the changes registered in the current account. Fourth, not all types of flows have shown the same degree of resilience, resulting in a profound change in the composition of international financial flows: while banking flows, which used to account for the largest share of the total before 2008, have collapsed, FDI flows have been barely affected and now represent roughly 45% of global flows. Portfolio flows stand between these two extremes, and within them equity flows have proved more robust than debt flows, which should help to strengthen resilience and deliver genuine cross-border risk-sharing. Having highlighted these stylized facts, this policy brief turns to possible explanations for and likely implications of these changes, regarding international financial stability issues.