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How important is the Global Financial Cycle? Evidence from capital flows

Author

Listed:
  • Eugenio Cerutti
  • Stijn Claessens
  • Andrew K Rose

Abstract

This study quantifies the importance of a Global Financial Cycle (GFCy) for capital flows. We use capital flow data disaggregated by direction and type between Q1 1990 and Q4 2015 for 85 countries, and conventional techniques, models and metrics. Since the GFCy is an unobservable concept, we use two methods to represent it: directly observable variables in centre economies often linked to it, such as the VIX; and indirect manifestations, proxied by common dynamic factors extracted from actual capital flows. Our evidence seems mostly inconsistent with a significant and conspicuous GFCy; the two methods combined rarely explain more than a quarter of the variation in capital flows. Succinctly, most variation in capital flows does not seem to be the result of common shocks nor stem from observables in a central country like the United States.

Suggested Citation

  • Eugenio Cerutti & Stijn Claessens & Andrew K Rose, 2017. "How important is the Global Financial Cycle? Evidence from capital flows," BIS Working Papers 661, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:661
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    References listed on IDEAS

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    Cited by:

    1. Claudia M. Buch & Matthieu Bussiere & Linda Goldberg & Robert Hills, 2018. "The International Transmission of Monetary Policy," NBER Working Papers 24454, National Bureau of Economic Research, Inc.
    2. Ramon Moreno & José María Serena Garralda, 2018. "Firms' credit risk and the onshore transmission of the global financial cycle," BIS Working Papers 712, Bank for International Settlements.
    3. Davis, J. Scott & Van Wincoop, Eric, 2017. "Globalization and the Increasing Correlation between Capital Inflows and Outflows," Globalization and Monetary Policy Institute Working Paper 323, Federal Reserve Bank of Dallas.
    4. Ragna Alstadheim & Christine Blandhol, 2018. "The global financial cycle, bank capital flows and monetary policy. Evidence from Norway," Working Paper 2018/2, Norges Bank.
    5. repec:scn:financ:y:2018:i:2:p:38-53 is not listed on IDEAS
    6. repec:usg:auswrt:2017:68:01:63-82 is not listed on IDEAS

    More about this item

    Keywords

    empirical; data; centre; country; panel; fit; VIX; equity; bonds; FDI; credit;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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