How Important is the Global Financial Cycle? Evidence from Capital Flows
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, in that 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.
Cerutti is Assistant to the Director, IMF Research Department, Claessens is Head of Financial Stability Policy, BIS Monetary and Economic Department, and CEPR Research Fellow, and Rose is Rocca Professor at Berkeley-Haas, ABFER Senior Fellow, CEPR Research Fellow, and NBER Research Associate. We thank Nathan Converse and Carmen Reinhart for providing data, and Tamim Bayoumi, Olivier Blanchard, Antoine Bouveret, Steve Davis, Robin Koepke, Maurice Obstfeld, David Reeb, Hyun Song Shin, Anand Srinivasan, Johan Sulaeman, Shang-Jin Wei and workshop participants at ABFER and NUS for comments. Rose thanks the National University of Singapore for hospitality during the course of this research. A current version of the paper, the data set and key output are freely available at Rose’s website. All opinions expressed in this paper are those of the authors, and not of the institutions they are affiliated with. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Eugenio Cerutti & Stijn Claessens & Andrew K. Rose, 2019. "How Important is the Global Financial Cycle? Evidence from Capital Flows," IMF Economic Review, vol 67(1), pages 24-60. citation courtesy of