How Important is the Global Financial Cycle?

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How Important is the Global Financial Cycle?
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How Important is the Global Financial Cycle? Evidence from Capital Flows Eugenio Cerutti, Stijn Claessens and Andrew K. Rose Q: How Important is Global Financial Cycle for Capital Flows? Rey and others: very Risky asset prices around the

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How Important is the Global Financial Cycle? Evidence from Capital Flows Eugenio Cerutti, Stijn Claessens
and Andrew K. Rose<br>
02
Q: How Important is Global Financial Cycle for Capital Flows? Rey and others: very
“Risky asset prices around the globe, from stocks to corporate bonds, have a strong common component. So do capital flows … The global financial cycle can be related to monetary conditions in the centre country and to changes in risk aversion and uncertainty … capital flows … are largely driven by a global factor … “
- Rey (2013, pp 1-2) Rose: Quantifying Global Financial Cycle Effect on Capital Flows 2<br>
03
Key Finding: Effects of Global Financial Cycle on capital flows just not that important Plain vanilla approach: conventional techniques, models, metrics
Use capital flow panel dis-aggregated by direction/type, 1990Q1-2015Q4, 85 countries
Measure GFCy via: a) observables in central countries (VIX) and b) unobservables (commonality in capital flows, via extracted dynamic factors)
Little evidence of significant, conspicuous GFCy
Using both measures gives upper bound of ≈25% of capital flow variation explained by GFCy
Often much less Rose: Quantifying Global Financial Cycle on Capital Flows 3<br>