Destabilizing Capital Flows amid Global Inflation

Research Question

Bengui and Coulibaly ask whether the pattern of capital flows observed during the 2021–2023 global monetary tightening cycle — whereby capital flowed from low-inflation to high-inflation countries — was a stabilizing or destabilizing force for the global economy’s adjustment to cost-push shocks. Among the G7 and a broader sample of 26 jurisdictions, those with higher average CPI inflation (October 2021–March 2023) and larger cumulative interest rate hikes ran more negative current account balances over the same period, with the slope of the cross-sectional relationship between cumulative hikes and the current account equal to −1.29 (significant at 1%) and the slope between average inflation and the current account equal to −0.99 (significant at 1%), and over 75% of the top two quartile hikers running deficits while over 75% of the bottom two quartiles ran surpluses.

Julien Bengui | Macro Paper Warehouse

Destabilizing Capital Flows amid Global Inflation