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The global financial cycle, bank capital flows and monetary policy. Evidence from Norway

Author

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  • Ragna Alstadheim

    (Norges Bank (Central Bank of Norway))

  • Christine Blandhol

    (University of Chicago and Statistics Norway)

Abstract

We investigate the importance of a global financial cycle for gross capital inflows based on monthly balance sheet data for Norwegian banks. The VIX index has been interpreted as an “investor fear gauge” and associated with a global financial cycle. This index has also been found to impact real activity. We include both a global activity variable and the VIX index in our structural VAR model of capital inflows. We find that when global activity falls, banks’ foreign funding share falls. Our results suggest that global real activity rather than a global financial cycle is a main driver behind the volume of bank capital inflows. We also study domestic monetary policy and implications for capital flows. Domestic monetary policy helps absorb VIX shocks and there is no indication of procyclical (“carry trade”) effects on funding. Monetary policy affects activity and inflation in a standard fashion, and the exchange rate acts as a buffer when shocks hit the economy.

Suggested Citation

  • Ragna Alstadheim & Christine Blandhol, 2018. "The global financial cycle, bank capital flows and monetary policy. Evidence from Norway," Working Paper 2018/2, Norges Bank.
    • Handle: RePEc:bno:worpap:2018_02
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    File URL: https://www.norges-bank.no/en/Published/Papers/Working-Papers/2018/22018/
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    Cited by:

    1. Akdi, Yilmaz & Varlik, Serdar & Berument, M. Hakan, 2020. "Duration of Global Financial Cycles," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 549(C).
    2. Christian Friedrich & Pierre Guérin & Danilo Leiva-Leon, 2020. "Monetary Policy Independence and the Strength of the Global Financial Cycle," Staff Working Papers 20-25, Bank of Canada.

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    More about this item

    Keywords

    Bank Capital flows; Uncertainty-shocks; Structural VAR;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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