There have been a growing number of news articles showing that cross-boarder capital flows have not returned to pre-crisis highs. This is an important topic that has not been given much attention. Capital flows is more important than actual trade flows. Money is not flowing around the world. Should we have more capital flows? This is an important economic question.
Some of the decline can be easily explained. The cross-border flows within the EU have dried since the sovereign debt crisis. Carry trades have declined because interest differentials have fallen. Banks have reduced lending because they want to improve their balance sheets. Regulators have made it more difficult to move money around the world through levered bank lending. Barriers to capital flow are on the rise.
It is true that we want to have less hot money moving around the world that can lead to sudden stops in emerging markets, but the movement of capital from those countries that save to those that need funds for investment and consumption is critical for global growth. Now there have been problems with cross-boarder flows from emerging markets to developed countries which have to be addressed, but it is hard to think about a robust global economy where less capital is being traded or moving.
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