Bilateral capital flows: Gravity, push and pull

Using bilateral capital-flow data from 10 advanced reporting economies, with over 186 bilateral country pairs, from 2000 to 2016, this paper provides evidence of the significance of gravity factors, such as information asymmetries and economic ties, in explaining cross-border bilateral financial-asset flows. In addition, this study offers new evidence of regional contagion, with bilateral capital flows decreasing more for pairs of countries with closer geographic proximity (or with less information friction) than for those that are farther apart when global risk aversion rises. These findings have policy implications for the importance of information frictions, bilateral trade ties and regional cooperation in determining the level of bilateral financial-asset flows.