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

By Eugenio M Cerutti, Stijn Claessens, Andrew K. Rose

September 1, 2017

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Eugenio M Cerutti, Stijn Claessens, and Andrew K. Rose How Important is the Global Financial Cycle? Evidence from Capital Flows, (USA: International Monetary Fund, 2017) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Balance of payments, Capital flows, Econometric analysis, Emerging and frontier financial markets, Factor models, Financial cycles, Financial markets, Financial sector policy and analysis, Foreign direct investment

Keywords: Bonds, Capital, Capital flow, Capital flow episode, Capital flow equation, Capital flow fluctuation, Capital flow model, Capital flow movement, Capital flow type, Capital flows, Center, Country, Credit, Data, Emerging and frontier financial markets, Empirical, Equity, Factor models, FDI, Financial cycles, Fit, Flow factor, Flow type, Foreign direct investment, GFCy impact, Global, Panel, Portfolio debt, Variation in capital flow, VIX, WP

Publication Details

Pages:

67
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/193
Stock No:

WPIEA2017193
ISBN:

9781484316603
ISSN:

1018-5941

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