The rapid expansion of gross foreign debt assets and liabilities in advanced economies explain the greater intensity of financial transactions worldwide —specifically, the sharp increase in twoway trade of debt-type instruments. However, debt securities carry risks to financial stability for the countries involved regardless of their current account balance (Gourinchas, 2011). In the event of a negative shock to global liquidity, counterparty risk sharply increases and it potentially destabilizes the overall financial system. For instance, countries with greater proportion of short-term liabilities may have the risk to rollover their obligations. Liquidity problems can easily propagate and lead to insolvency of financial institution. The ensuing contagion can spread rapidly across national borders (Obstfeld, 2012).

Recent efforts in the literature have focused on the synchronization of real and financial cycles across economies (Claessens, Kose and Terrones, 2012). An expansion of credit in the domestic economy can lead to a stronger growth —typically, through higher TFP growth rather than robust investment (Levine, 2005). However, it can also lead to greater volatility and higher incidence of financial crises (Kaminsky and Reinhart, 1999; Gourinchas and Obstfeld, 2012). In turn, credit booms can be typically the outcome of surges in private capital inflows (Bruno and Shin, 2013; Calderón and Kubota, 2013), and the rapid increase in banking leverage has typically preceded periods of financial instability and crisis (Borio and Disyatat, 2011; Gourinchas and Obstfeld, 2012).

To the extent that surges of gross inflows statistically precede excessive monetary expansions, credit booms, asset price bubbles, overvalued currencies and raises the economy’s vulnerability to currency and maturity mismatches, it is imperative for policy makers to understand fully the impact of inflow surges on financial markets —as captured by booms in credit (as well as asset prices). This has led to a renewed debate on the implementation of macro-prudential policies to manage systemic risks. The objective of macro-prudential policy tools is, for example, to contain systemic risks associated to excessive credit creation instead of eliminating the cycle of credit. Therefore, these tools are implemented to decouple or mitigate the relationship between surges in inflows and the incidence of credit booms. In this context, a mixed policy toolkit (with monetary and macro-prudential policy tools as long as they are complement each other), along with a sound regulatory framework, is required to manage large capital inflows (Balakrishnan et al., 2012). In spite of the prescription of a mixed policy toolkit, it is still recommended the use of conventional macroeconomic instruments as the first line of defense against large-scale capital flows (Chowdhury and Keller, 2012).

Our goal is to examine whether pull and/or push factors drive surges in gross capital inflows. We conduct Probit and Complementary log-log panel regression analysis for a sample of 67 countries using quarterly data from 1975 to 2010. The rapid financial globalization and increasing two-way capital flows have led to sharper gross capital movements (in and out of the domestic economy) that do not necessarily show up in movements of net inflows. Consequently, these net inflow movements cannot always explain these developments. We test the hypothesis by comparing the ability of pull and push factors in driving surges in gross inflows relative to 3