International Lending in War and Peace, 1790-2020, joint with Sebastian Horn and Carmen Reinhart

Abstract: We show that private international capital flows collapse in times of war and disaster, while the opposite is true for official (government-to-government) lending. These official capital flows are much larger than previously known, as we show with a  newly compiled dataset covering 1.8 million cross-border loans, grants and guarantees issued by foreign governments and multilateral organizations since 1790. Sovereign  lending is markedly countercyclical, with pronounced surges in lending during major crises such as WW1, WW2 or the 2008 crash. In contrast, private lending flows collapse during crises, showing strong pro-cyclical patterns. Throughout modern history, it has been government lending that has helped to avert financial collapse or military defeat, while private markets have not been a reliable source of funding in situations of emergency. In case of future geopolitical and financial turmoil, one can expect state-led capital flows to again take over the leading role in the international financial system.