Capital Flow Dynamics And The Synchronization Of Financial Cycles And Business Cycles In Emerging Market Economies

This study assesses the dynamics of capital flow, financial cycles, and business cycles in emerging market economies (EMEs). Using historical quarterly data from 12 EMEs, it shows that: (a) capital flow cycles tend to be more volatile than financial and business cycles, (b) although significant heterogeneities exist in the dynamics of these cycles across EMEs, financial and business cycles tend to be similar in terms of amplitudes, (c) significant concordance exists between different cycles and between the same cycles across countries, and (d) capital flow cycles tend to lead financial and business cycles. These findings do not only provide clear guidance on the use of central bank policy mix strategy in response to capital flow, financial, and business cycles; they also imply strong interconnection between EMEs, in the sense that they appear to simultaneously experience expansions and recessions. This has an important implication for policy making in EMEs, as it shows that these markets can gain more from coordinating their policies as opposed to working in isolation.