Article | Journal of the European Economic Association | October 2014

Sovereigns, Upstream Capital Flows and Global Imbalances

by Laura Alfaro, Sebnem Kalemli-Ozcan and Vadym Volosovych

Abstract

We construct measures of net private and public capital flows for a large cross-section of developing countries considering both creditor and debtor side of the international debt transactions. Using these measures, we demonstrate that sovereign-to-sovereign transactions account for upstream capital flows and global imbalances. Specifically, we find (1) international net private capital flows (inflows minus outflows of private capital) are positively correlated with countries' productivity growth; (2) net sovereign debt flows (government borrowing minus reserves) are negatively correlated with growth only if net public debt is financed by another sovereign; (3) net public debt financed by private creditors is positively correlated with growth; and (4) public savings are strongly positively correlated with growth, whereas the correlation between private savings and growth is flat and statistically insignificant. These empirical facts contradict the conventional wisdom and constitute a challenge for the existing theories on upstream capital flows and global imbalances.

Keywords: current account; aid/government debt; reserves; puzzles; productivity; Sovereign Finance; Developing Countries and Economies; Macroeconomics;

Citation:

Alfaro, Laura, Sebnem Kalemli-Ozcan, and Vadym Volosovych. "Sovereigns, Upstream Capital Flows and Global Imbalances." Journal of the European Economic Association 12, no. 5 (October 2014): 1240–1284. (Also NBER Working Paper 17396. Online Appendix. See International capital flows database for the data on measures of net private and public capital flows for a large cross-section of developing countries.)

Supplemental Information

  1. For the data on measures of net private and public capital flows for a large cross-section of developing countries.