The Global Crisis led to massive swings in international capital flows, with unprecedented sheer volatility (Milesi-Ferretti and Tille 2011). While international capital flows have remained below their pre-Crisis levels ever since, several countries experienced capital inflow surges owing to their high growth prospects and interest rate differentials (Ahmed and Zlate 2014).
Remarkably, safe haven inflows to financial centres during and after the Crisis have been mentioned numerous times by the financial press and international organisations.1 In fact, it was often argued that safe haven flows were behind the fluctuations of various macroeconomic and financial indicators. However, this presumption of safe haven inflows during global turmoil was not rigorously studied using balance of payments statistics until now. My recent research attempts to shed light on capital flow waves to and from Switzerland, a financial centre with a safe haven currency (Yeşin 2015).
No surges in private capital flows to Switzerland
In Yeşin (2015), I identify waves of capital flows to and from Switzerland from 2000:Q1 to 2014:Q2 by using a simple statistical method. In particular, the analysis identifies periods when capital inflows to Switzerland registered unusually high or low values (surges and stops of inflows) and periods when capital outflows from Switzerland registered unusually high or low values (flight and retrenchment of outflows).2 For the sake of completeness, the study also identifies periods when net capital flows registered extreme values. The terminology regarding capital flow waves is taken from Forbes and Warnock (2012). The statistical methodology is similar to those used in the literature, such as Powell and Tavella (2012), Ghosh et al. (2014), and Cardarelli et al. (2010). In the analysis, I use a recursive Hodrick–Prescott filter to calculate the underlying trend of the data. Then the normal range in each quarter is defined by the trend +/- 1.15 times the standard deviation during the previous 12 quarters. Values of capital flows that fall outside of this normal range are identified as extreme movements, i.e. surges, stops, flight, or retrenchment.
In the following three figures, the sample period is divided into three sub-periods: the pre-financial-crisis period, between 2000:Q1 and 2006:Q4; the financial crisis period, between 2007:Q1 and 2009:Q2 (shaded in the figures); and the post-financial-crisis period, between 2009:Q3 and 2014:Q2.3 In addition, notable events that affected financial markets are indicated with vertical lines to provide some context. These are the collapse of Lehman Brothers in 2008:Q3 (‘Lehman’), the Eurozone sovereign debt crisis in 2010:Q2 (‘EA Crisis I’), the extended bailout of Greece in conjunction with the US debt-ceiling crisis in 2011:Q3 (‘EA Crisis II’), and the speech by Ben Bernanke on tapering in 2013:Q2 (‘Bernanke Tapering’). These events significantly increased the uncertainty and volatility of global financial markets, as measured, for example, by sudden spikes in the Chicago Board Options Exchange’s volatility index, VIX. They were considered to trigger international capital flows with possible repercussions on financial markets.
Figure 1 illustrates private capital inflows to Switzerland where periods of surges and stops are indicated.4 Positive values of capital inflows lead to an increase in foreign liabilities of Switzerland, whereas negative values indicate repatriation. During the pre-crisis period, four instances of capital surges (2004:Q1, 2005:Q2, 2005:Q3, and 2006:Q1) and one instance of a capital stop (2005:Q4) occurred. Then, during the financial crisis, private capital inflows surged in 2007:Q1 and stopped in 2008:Q2. After the financial crisis, however, one instance of a capital surge occurred in 2011:Q3, and one instance of a capital stop occurred in 2012:Q4. Thus, during the run-up to the financial crisis, private capital inflows often registered surges, but since 2008:Q2, they have largely been within the normal range. Among the notable events, only the EA Crisis II event in 2011:Q3 coincided with a surge in private capital inflows. However, the level of capital inflows is low compared to the earlier surges in the pre-crisis period. Thus balance of payments data does not support the presumption of higher safe haven inflows to Switzerland since the crisis. In fact, capital inflows to Switzerland have decreased on average and have become less volatile after the crisis.
Figure 1. Private capital inflows to Switzerland (% of GDP)
Source: SNB and author’s calculations.
Missing outflows from Switzerland since the crisis
Next, Figure 2 displays private capital outflows from Switzerland where periods of flight and retrenchment are indicated. During the pre-crisis period, four instances of capital flight (2004:Q1, 2005:Q2, 2005:Q3, and 2006:Q1) and two instances of capital retrenchment (2005:Q4 and 2006:Q4) occurred. Then, during the financial crisis, capital outflows registered a flight in 2007:Q1 and a retrenchment in 2008:Q2. Since the crisis, however, private capital outflows have shown only one extreme movement – a flight in 2013:Q3. Thus, during the run-up to the financial crisis, private capital outflows frequently registered flights, but since 2008:Q2, they have largely been within the normal range. None of the notable events coincided with a retrenchment or flight of capital outflows. Only the Bernanke Tapering event preceded a flight of private capital outflows from Switzerland in 2013:Q3. Nevertheless, the level was low relative to other flight periods during the pre-crisis period. Similar to inflows, capital outflows from Switzerland have decreased on average and have become less volatile after the crisis.
Figure 2. Private capital outflows from Switzerland (% of GDP)
Source: SNB and author’s calculations.
Very volatile net capital flows since the crisis
While private capital inflows and outflows have declined on average and have become less volatile after the financial crisis, net private capital flows exhibit a completely different pattern. Figure 3 illustrates net private capital flows where abnormally low and high values are indicated. In this figure, positive values mean net outflows from Switzerland. During the whole sample, numerous abnormal values of net private capital flows can be identified. In particular, six instances of abnormally high values and nine instances of abnormally low values materialised. Interestingly, most of the abnormally high values occurred before the financial crisis, whereas most of the abnormally low values occurred during or after the financial crisis. Remarkably, two of the notable events, namely, the EA Crisis I and EA Crisis II events, coincided with abnormally low values of net private flows. Furthermore, immediately after the collapse of Lehman Brothers two abnormally low values were registered in 2008:Q4 and 2009:Q1.
Interestingly, net private capital flows have become extremely volatile for Switzerland with the financial crisis. In other words, the historical positive correlation between inflows to and outflows from advanced economies, previously studied in Broner et al. (2013), has significantly decreased for Switzerland with the onset of the financial crisis resulting in volatile net capital flows.5
Figure 3. Net private capital flows to and from Switzerland (% of GDP)
Source: SNB and author’s calculations.
Financial crisis: A breaking point for capital flows
Balance of payments statistics show that capital flows to and from Switzerland were strongly affected by the financial crisis. But higher safe haven inflows to Switzerland did not materialise. Remarkably, abnormally low values of net flows were not necessarily driven by surges of private capital inflows. In fact, declined capital outflows that are less correlated with capital inflows appear to be the main factor. These findings suggest that the financial crisis generated a breaking point for capital flows to and from Switzerland.
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Broner, F, T Didier, A Erce, and S L Schmukler (2013), “Gross capital flows: Dynamics and crisis”, Journal of Monetary Economics 60(1): 113–133.
Cardarelli, R, S Elekdag, and M A Kose (2010), “Capital inflows: Macroeconomic implications and policy responses”, Economic Systems 34(4): 333–356.
Forbes, K J and F E Warnock (2012), “Capital flow waves: Surges, stops, flight, and retrenchment”, Journal of International Economics 88(2): 235–251.
Ghosh, A R, M S Quereshi, J I Kim, and J Zalduendo (2014), “Surges”, Journal of International Economics 92(2): 266–285.
Milesi-Ferretti, G M, and C Tille (2011), “The great retrenchment: International capital flows during the global financial crisis”, Economic Policy 26(66): 285–342.
Powell, A and P Tavella (2012), “Capital inflow surges in emerging economies: How worried should LAC be?”, IDB Working Paper 326, Inter-American Development Bank.
Yeşin, P (2015), “Capital flow waves to and from Switzerland before and after the financial crisis”, SNB Working Paper 15-01, Swiss National Bank.
2 The methodology differentiates between capital flows initiated by foreign investors and those initiated by domestic investors. Thus, foreign investors who initiate capital inflows are the drivers of surges and stops, whereas domestic investors who initiate capital outflows are the drivers of flight and retrenchment.
3 The start and end quarters of the financial crisis sub-periods are chosen based on the crisis timeline published by the Federal Reserve Bank of St Louis. The timeline starts with events in February 2007 and ends with events in July 2009.
4 Private capital flows are defined as gross flows except flows that go to or emanate from the public sector. In particular, reserve accumulations by central banks are not included in private capital flows.
5 Yeşin (2015) shows that the simple correlation coefficient between private capital inflows and private capital outflows has decreased to zero for Switzerland. The correlation between gross capital inflows and outflows has also decreased to 0.8.