Substitution patterns in capital inflows: Evidence from disaggregated capital flow data

Abstract

Superficial examination of aggregate gross cross-border capital inflow data suggests that there was no substitution between portfolio inflows and bank loans in recent years. However, our novel analysis of disaggregate inflows shows interesting heterogeneity in advanced economies (AE) and emerging markets (EM), highlighting the importance of differentiating by types of instrument and borrowing sector. There has been substitution of bank loans for portfolio debt securities not only in the case of AE sovereign borrowers and AE corporate borrowers (from 2008), but also in the case of EM sovereign borrowers. However, in the case of AE corporate borrowers (before 2008) and EM corporate borrowers (from 2008), the relationship corresponds to complementarity across types of gross capital inflows, especially during periods of positive capital gross inflows after the global financial crisis. A large part of these patterns does not seem to be driven by a common phenomenon across countries, but rather by country-specific factors.