Sudden stops in international capital flows: Global financial conditions, domestic fundamentals, and the mitigating role of macroprudential policies

Type of the article: Research ArticleAbstractVolatility in international capital flows remains a key source of global financial stability, particularly in the manifestation of sudden stop episodes with disruptive consequences. This study examines how global financial conditions, domestic macroeconomic fundamentals, and macroprudential policy responses shape the likelihood of sudden stop episodes in international capital flows. The analysis utilizes an unbalanced quarterly panel of up to 64 advanced and emerging economies over 1980–2024, in which sudden stop episodes in total, portfolio, and cross-border bank gross inflows are constructed following the Forbes and Warnock methodology. A panel probit with clustered standard errors is employed to estimate the likelihood of sudden stop episodes. The results indicate that tighter global financial conditions, measured by global uncertainty and long-term interest rates, significantly increase the probability of sudden stop episodes across capital flow categories. For total inflows, a one-point increase in the VIX raises sudden stop probability by 0.39 percentage points, while a one-standard-deviation increase raises it by 2.66 percentage points. Stronger domestic fundamentals, including high capital account openness and higher growth, reduce sudden stop risk, whereas elevated domestic credit significantly increases this risk. Emerging economies exhibit a structurally higher baseline probability than advanced economies, even after controlling global and domestic factors. Macroprudential policy tightening does not prevent sudden stop risk unconditionally, but when tightened amidst domestic credit expansion, it significantly mitigates sudden stop probability. These effects are most pronounced for Total and Cross-border sudden stop episodes, whereas portfolio flow sudden stops are largely driven by global push factors.