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How Important is the Global Financial Cycle? Evidence from Capital Flows

Author

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  • Eugenio M 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 dis-aggregated by direction and type between 1990Q1 and 2015Q5 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 center 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; both 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 M Cerutti & Stijn Claessens & Andrew K. Rose, 2017. "How Important is the Global Financial Cycle? Evidence from Capital Flows," IMF Working Papers 17/193, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:17/193
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    References listed on IDEAS

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    1. repec:scn:financ:y:2018:i:2:p:38-53 is not listed on IDEAS
    2. repec:usg:auswrt:2017:68:01:63-82 is not listed on IDEAS
    3. J. Scott Davis & Eric van Wincoop, 2017. "Globalization and the Increasing Correlation between Capital Inflows and Outflows," NBER Working Papers 23671, National Bureau of Economic Research, Inc.
    4. 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.
    5. 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.
    6. Ragna Alstadheim & Christine Blandhol, 2018. "The global financial cycle, bank capital flows and monetary policy. Evidence from Norway," Working Paper 2018/2, Norges Bank.

    More about this item

    Keywords

    Capital flows; Globalization; Monetary policy; Financial cycles; Panel analysis; Cross-country analysis; Capital market volatility; empirical; data; center; country; panel; fit; VIX; equity; bonds; FDI; credit; empirical; data; center; country; panel; fit; VIX; equity; bonds; FDI; credit; Financial Aspects of Economic Integration; Globalization: Finance;

    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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