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The global capital flows cycle: structural drivers and transmission channels

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  • Habib, Maurizio Michael
  • Venditti, Fabrizio

Abstract

In this paper, we study the effects of structural shocks that influence global risk – the main factor behind a “global capital flows cycle” – and how risk, in turn, is transmitted to capital flows. Our results show that not all the risk shocks driving the global financial cycle have the same effects on capital flows. Changes in global risk caused by pure financial shocks have the largest impact on the global configuration of capital flows, followed by US monetary policy shocks. As regards the transmission of risk to capital flows, we uncover a traditional “trilemma”, as countries more financially open and adopting a strict peg are more sensitive to global risk. This “trilemma” is mainly driven by one category of cross-border flows, “other investment”, confirming the importance of cross-border banking loans in the narrative of the global financial cycle. JEL Classification: E42, E52, F31, F36, F41

Suggested Citation

  • Habib, Maurizio Michael & Venditti, Fabrizio, 2019. "The global capital flows cycle: structural drivers and transmission channels," Working Paper Series 2280, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20192280
    Note: 334027
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    capital flows; global financial cycle; global risk; international spillover; monetary policy;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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