The great retrenchment: international capital flows during the global financial crisis

The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first, across time, being especially dramatic in the wake of the Lehman Brothers’ failure; secondly, across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception; and thirdly, across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is…