criterion to define inflow surges. We divide the amount of gross inflows by the amount of real GDP. More specifically, we take the one-year (4-quarter) lagged value of real GDP.<sup>10</sup> Finally, we identify surges in gross inflows for both overall amount of inflows and private capital inflows.<sup>11</sup> Private inflows are computed as the overall inflows minus its public sector component —that is, gross other investment (OI) inflows associated to OI general government and monetary authority inflows.<sup>12</sup>

# **3.2 Data and Episode Counting**

Our database comprises quarterly information on net and gross capital inflows for 71 countries (23 industrial economies and 48 developing countries) from 1975q1 to 2010q4. We have collected data on the overall amount of both net and gross capital inflows as well as its different components —foreign direct investment (FDI), portfolio investment (PI) (in equity and debt securities), and other investment. The database also includes the components of gross OI inflows —such as OI monetary authority, OI government, OI bank, and OI other sector inflows.

Based on the different components of the overall net and gross inflows, we distinguish between equity-based vis-à-vis debt-based gross capital inflows. Equity-based inflows are defined as the sum of FDI inflows and portfolio inflows in equity securities. Debt-based gross inflows, on the other hand, are the sum of portfolio inflows in debt securities and other investment (OI) inflows. The data on capital flows is collected from the IMF’s Balance of Payments Statistics. We normalize gross capital flows by the permanent component of GDP (in US dollars at current prices). The GDP data is gathered from the World Bank’s World Development Indicators (WDI) and the permanent component of GDP is then computed with the Hodrick-Prescott filter (HP filter).

# _Episode Count_

We first identify the number of episodes of surges in capital inflows from our quarterly database on gross capital inflows for 71 countries from 1975q1 to 2010q4. Table 1 enumerates the number of these episodes for: (a) different groups of countries, (b) different definitions of gross inflows —say, overall vs. private gross inflows, and debt- vs. equity-based inflows, and (c) different criteria (CDMN vis-à-vis FW).

> 10 We also divide the amount of gross inflows to the actual (rather than lagged) GDP. The episode count as well as the empirical analysis with these episodes of surges is not reported but is available upon request. 11 Note that we focus on surges in gross inflows rather than those in net inflows. Surges in net inflows can be driven by: (i) foreign investors pouring new financial resources into the domestic economy, or (ii) domestic investors shifting their portfolio back to the domestic economy (i.e. an increase in portfolio home bias). This paper focuses on the behavior of foreign investors and on policy implications to address issues related to inflows of foreign financing. Therefore, we use gross rather than net capital inflows.

> 12 For the same of completeness, and especially for developing countries, we have also identified surges in “net” capital inflows. See Table 1 for the number of episodes in net inflows vis-à-vis gross inflows.

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