4  All speeches are available online at www.bankofengland.co.uk/speeches  4  Chart 5: The distribution of capital flows to emerging market economies Unconditional distribution  Probability density 0.10  Negative shock  0.08 0.06 0.04  A  B  0.02 0.00 -8  -6  -4  -2  0  2  4  6  8  10  12  14  16  18  Capital flows as a % of GDP  Sources: IMF and Bank of England staff calculations. Notes: This chart shows the unconditional distribution of capital flows to EMEs over 2006-2018, and an estimated distribution conditional on a one standard deviation negative shock to pull factors. The diamonds highlight the fifth percentile, which is our preferred measure of Capital Flows-at-Risk. We estimate several quantiles of the distribution through quantile regression and then fit a skewed-t distribution; hence, the distribution can both shift and change shape in response to shocks - see annex for further details. The grey line in Chart 5 shows the unconditional distribution of capital flows, and the purple line shows how the distribution shifts in response to a negative shock. “Capital Flows-at-Risk” are defined as capital outflows in a severe, low-probability event (that with 5% probability or less). The left tail ‘fattens’ if bad outcomes become more likely and/or the “5% probability event” becomes more severe – shown by the shift from A (Capital Flows-at-Risk of 1.2% of GDP) to B (Capital Flows-at-Risk of 4.2% of GDP).
This is why there is an urgent need to agree on concrete short-term commitments for structural reforms in the Member States, on a consequent application of the Stability and Growth Pact, on the aggregate fiscal stance for the euro area, on a strategy for investment, and to launch work on a long-term vision to further share sovereignty ensuring the sustainable and smooth functioning of EMU. On that note, I am looking forward to our discussion. 4  BIS central bankers’ speeches