abrupt reversal (i.e. “ _sudden stop_ ”).<sup>5</sup> Their characterization of capital inflow bonanzas shows that these episodes are highly likely to be related to banking, currency and inflation crisis in developing countries and hence, they systematically precede sovereign default episodes (Reinhart and Rogoff, 2008). Cardarelli, Elekdag, and Kose (2010) extend the Reinhart and Reinhart (2009) study and examine the experience of massive capital inflows to industrial economies and emerging markets. They identify 109 episodes of large net private capital inflows in 52 countries over 1987-2007 —of which 87 episodes were completed by 2006. These episodes of massive (net) inflows were associated with an acceleration of economic growth (although a transitory one), and they are likely to end up with a sudden stop or a currency crisis.<sup>6</sup> As a result, the surge in capital inflows is also associated to deterioration in the current account and a real effective exchange rate appreciation.

Forbes and Warnock (2012a) undertake one of the first comprehensive studies that examine extreme movements in gross capital flows. They identify episodes where domestic and foreign investors increase or decrease significantly their flow of capital into or out of the domestic economy (i.e. surges, stops, flights, and retrenchment episodes)<sup>7</sup> . They use gross inflows and outflows from 1980 to 2009 for more than 50 emerging and developed economies—thus, differentiating between changes in the portfolio of domestic vis-à-vis foreign investors— but also quarterly data on gross capital flows —which better captures the movements of capital along the cycle. They show that surges are mainly driven by global factors (say, _push_ factors): lower global risk (driven by decreased economic uncertainty and changes in risk appetite) and sustained global growth will increase the probability that countries will experience surges. They also find that a loose monetary policy stance in the advanced world will increase the probability of surges of inflows in middle-income countries. On the other hand, economic growth is the sole domestic driver of surges with significant explanatory power. Robust growth is associated with a higher probability of inflow surges. Remarkably, they fail to find any explanatory power for the depth of the country’s financial system.

Forbes and Warnock (2012b), in turn, examine the extent to which extreme movements in gross flows (i.e. surges, stops, flights and retrenchments) are drive by different types of capital flows. They divide them into debt- and equity-led episodes. For instance, if gross inflow increases are mainly attributed to debt-type flows (say, bonds and banking flows), they identify this episode as debt-led surge. If driven by equity inflows (say, FDI and portfolio equity), it is an equity-led surge. They find, on the one hand, that equity-led surges do not have a systematic association with either pull or push factors —therefore, they are more likely to be idiosyncratic. On the other

> 5 Agosín and Huaita (2011, 2012) show that capital flow bonanzas —measured by sharp increases in (net) capital inflows— sow the seeds of sudden stops in emerging market economies.

> 6 Empirical evidence shows that nearly 40 percent of complete episodes of massive capital inflows (34 out of 87) are followed by an abrupt reversal of inflows, and only 15 percent end up in a full-blown currency crisis (Cardarelli et al. 2010).

> 7 Along the lines of this research, Calderón and Kubota (2012) show that foreign and domestic investors’ decisions are driven by different factors and have dissimilar responses to shocks and policies.

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