How Important is the Global Financial Cycle?
Author : debby-jeon | Published Date : 2025-06-27
Description: 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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Transcript:How Important is the Global Financial Cycle?:
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 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 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 Much Interest in Global Financial Cycle (GFCy) Literature Rey and co-authors (many) Forbes and Warnock (2012) Ghosh et al (2014) Koepke (2015) Bruno and Shin (2015a, 2015b) Avdjviev et al (2016 a,b) IMF 2017 Annual Research Conference RIDGE 2017 Conference Rose: Quantifying Global Financial Cycle on Capital Flows 4 Serious Policy Implications Very synchronized GFCy implies EM policymakers can do little more than insulate their economies (capital controls, macro-prudential, ...) and blame US for exogenous shocks: “As capital flows respond to US monetary policy, they may not be appropriate for the cyclical conditions of many economies...” - Rey (2015, pp 9-10) Rose: Quantifying Global Financial Cycle on Capital Flows 5 Identifying GFCy: Empirical Strategy GFCy intrinsically unobservable Guiding idea: if GFCy consequential, should drive high proportion of fluctuations in most types of capital flows (and domestic credit creation, asset prices, ...) in many places, much of the time High commonality in financial conditions, manifest in capital flows, driven by observable global determinants The initial motivation: if the GFCy is so obviously important, why didn’t we already know about it? Plain vanilla approach: model, data, estimation, metrics …. Rose: Quantifying Global Financial Cycle on Capital Flows 6 Two Approaches to Measuring GFCy (Direct) Examine observable “fundamental” GFCy drivers, center-country macro/financial determinants of capital
