The Relation Between Extreme Episodes, Real Economy and Crises ─ Financial Account Breakdown Analysis

Most of the previous international economic research focuses on “net” capital flows rather than “gross” capital flows, which cannot distinguish the capital behavior from domestic investors and foreign investors. Although there is more research focusing on gross capital flows, it still lacks systematic research framework to analyse the international capital flows. Therefore, we systematically build 6 models to breakdown the capital flows from the aspects of domestic and foreign investors, inflows and outflows, and FDI, FPI and FOI for analyzing the effects of extreme episodes on GDP growth rate, investment, banking crisis and currency crisis in developing and advanced countries respectively. In developing countries, extreme episodes in foreign/FDI/FOI capital flows will depress GDP growth rate. If there is a sudden stop in capital flows causing banking crisis, the GDP growth rate will drop further. Besides, both extreme episodes in domestic and foreign capital flows, especially in the type of FDI and FOI will significantly affect investment.Moreover, extreme episodes in foreign/FPI/FOI capital flows not only increase the probability of banking crisis but also can serve as leading indicators of banking crisis. Last, sudden stop in foreign capital flows and FOI will rise up the probability of currency crisis. Sudden stop in foreign FOI and lower domestic capital flight can serve as leading indicators of currency crisis. On the other hand, in advanced countries, extreme episodes in foreign/FDI/FOI capital flows will depress GDP growth rate. Additionally, both extreme episodes in domestic and foreign capital flows, especially in the type of FDI and FOI will significantly affect investment. Moreover, extreme episodes in foreign/FPI/FOI capital flows will increase the probability of banking crisis and sudden stop in foreign capital flows, especially in FPI can serve as leading indicators of banking crisis. Last, extreme episodes do not have significant relation and impacts on currency crisis. To sum up, extreme episodes in capital flows have more significant impacts in developing countries than in advanced countries. In developing countries, policymakers should make more efforts to have a more comprehensive control or management in the international capital flows to stabilize the economy and avoid crises. In advanced countries, policymakers should have deeper understanding in the behaviors of foreign investors so that they can prevent extreme episodes occurrence.