Wednesday, October 2, 2013

Euro Zone Capital Flight - NY Fed Blog Post - Award for Solving the Riddle

The New York Fed, on its well-written blog, Liberty Street Economics, has posted Capital Flight in the Euro Area - NY Fed Research.   The post describes capital flight in the euro area during the crisis, and the accommodation of the flight in the Target2 payment system.   Their description is hard to square with the graph below which shows capital flight from Spain to be negatively correlated with the level of stress.   For example, capital flight in a low stress month, March, was four times as large as during November, the highest stress month in the period shown.  The data for all of 2011 and 2012, for Spain and Italy, more broadly show unexpected timing of capital flight.

We will pay $5,000 to the first person who, in the next week, correctly explains the conceptual error in the blog post that is highlighted by this riddle.  (Persons who have heard the explanation from us aren't qualified for payment but are most welcome to respond.)   Please submit answers to