The Global Financial Cycle: Quantities versus Prices

IMF Working Papers, July 19, 2024

Source details

Objective: Quantify the importance of the Global Financial Cycle (GFCy) in domestic credit and various local asset prices and compare it with that in capital flows.
Data and scope: Using 2000-2021 data for 76 economies and a simple methodology.
Core finding (median estimates):
- Domestic credit: each respective series’ common factor and conventional US GFCy-drivers together typically explain about 30 percent of the variation.
- Stock market returns: up to 40 percent.
- House prices: about 60 percent.
- Interest rates and government bond spreads: more than 75 percent.
- Capital flows: 25 percent.

The GFCy (measured via each series’ common factor plus conventional US GFCy-drivers) explains materially larger shares of variation in asset prices and rates than in capital flows:
- "about 30 percent" — domestic credit.
- "up to 40 percent" — stock market returns.
- "about 60 percent" — house prices.
- "more than 75 percent" — interest rates and government bond spreads.
- "25 percent" — capital flows (median estimate much exceeded by the above).
The results are based on panel analysis across 76 economies over the period 2000-2021 using a simple methodology.

The differential importance of the GFCy across quantities and prices has "important implications for economic and financial stability policies."
Notably relevant for the usage of quantity tools that impact asset prices, for example:
- FX interventions.
The findings help contextualize existing literature on the GFCy and cross-border spillovers, suggesting policy frameworks should account for stronger GFCy influence on asset prices and interest-rate related instruments than on capital flows.

Subject: Asset prices, Balance of payments, Capital flows, Credit, Exchange rate arrangements, Foreign exchange, Housing prices, Money, Prices.
Keywords (as provided): asset prices, bonds, capital flow management policies, capital flows, Captial account, center, comovements, country, credit, credit, data, empirical, equity, equity price, Exchange rate arrangements, FDI, financial conditions, fit, FX intervention, FX regime, Global, global financial cycle, Housing prices, importance of the Global Financial Cycle, macroprudential, panel, policy measures, structure model, term GFCy.

Source: The Global Financial Cycle: Quantities versus Prices — Eugenio M Cerutti and Stijn Claessens, July 19, 2024 (IMF Working Papers).