Cyclical Pattern in International Financial Flows to the Semi-periphery

Abstract

This study assesses how medium-term economic cycles in center countries drive patterns of short-term financial flows to semi-periphery economies. A portfolio optimization model demonstrates that financial inflows to semi-periphery countries can evolve countercyclically to center countries' medium-term cycles as investors shift away from the center during downturns. However, this substitution effect competes with a volume effect resulting from changes in total global investment. Using panel data for 1970-2020, the findings provide evidence that: (1) portfolio investments to semi-periphery countries are countercyclical to center economies' medium-term cycles; (2) FDI flows are less affected than shorter-term flows; (3) financial flows to periphery countries tend to be procyclical; and (4) financial and trade connections with center economies accentuate the substitution effect.