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

IMF Working Papers, September 1, 2017

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

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Bibliographic details

• Authors: Eugenio M Cerutti, Stijn Claessens, Andrew K. Rose
• Published: September 1, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484316603.001

Summary and Research Question

• This study quantifies the importance of a Global Financial Cycle (GFCy) for capital flows.
• Research period: between 1990Q1 and 2015Q5.
• Sample: 85 countries.
• Two representations of the GFCy:
  • Directly observable variables in center economies often linked to it, such as the VIX.
  • Indirect manifestations proxied by common dynamic factors extracted from actual capital flows.

Data and Methods

• Capital flow data dis-aggregated by direction and type.
• Conventional techniques, models and metrics are used.
• Factor models: common dynamic factors are extracted from actual capital flows to proxy the GFCy.

Key Findings

• 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.
• Succinct conclusion: 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 Areas and Keywords (as provided)

• Subjects: 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.

Content in this bundle

• How Important is the Global Financial Cycle? Evidence from Capital Flows, WP/17/193, September 2017
  • How Important is the Global Financial Cycle? Evidence from Capital Flows, WP/17/193, September 2017 (Markdown version)
  • How Important is the Global Financial Cycle? Evidence from Capital Flows, WP/17/193, September 2017 (PDF)