Can Countries Manage Their Financial Conditions Amid Globalization?

IMF Working Papers, January 24, 2018

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Can Countries Manage Their Financial Conditions Amid Globalization?

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Bibliographic details

• Authors: Nicolas Arregui, Selim A Elekdag, Romain Lafarguette, Dulani Seneviratne
• Published: January 24, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484338612.001

Summary and Objective

• Examines the evolving importance of common global components underlying domestic financial conditions.
• Develops financial conditions indices (FCIs) that enable comparison across a large set of advanced and emerging market economies.

Key Findings

• A common component, “global financial conditions,” accounts for about 20 percent to 40 percent of the variation in countries’ domestic FCIs.
• Notable heterogeneity exists across countries in the share of domestic FCI variation explained by the global component.
• The importance of global financial conditions does not seem to have increased markedly over the past two decades.
• On average, countries still appear to hold considerable sway over their own financial conditions—specifically, through monetary policy.
• The rapid speed at which foreign shocks affect domestic financial conditions may make it difficult to react in a timely and effective manner, if deemed necessary.

Methodology and Analytical Tools

• Construction and use of financial conditions indices (FCIs) for a broad set of advanced and emerging market economies.
• Use of econometric analysis tools, including Vector autoregression (as listed in subject and keywords), to decompose domestic FCIs into global and local components and to assess transmission dynamics.

Policy Implications and Considerations

• Monetary policy remains an effective lever, on average, for influencing domestic financial conditions despite significant global common components.
• Rapid transmission of foreign shocks implies potential challenges for timely policy responses; authorities may need to consider the speed of international spillovers when designing policy tools and response frameworks.
• Heterogeneity across countries suggests that policy design should be tailored to country-specific sensitivities to global financial conditions.

Relevant Subjects and Keywords (as provided)

• Subjects: Econometric analysis, Emerging and frontier financial markets, Exchange rate flexibility, Financial conditions index, Financial markets, Financial sector development, Financial sector policy and analysis, Foreign exchange, Vector autoregression
• Keywords: commodity price inflation, domestic financial conditions, Emerging and frontier financial markets, Exchange rate flexibility, financial condition shock, Financial conditions, Financial conditions index, Financial sector development, foreign direct investment, Global, global financial conditions, interest rate, international policy transmission, monetary policy, monetary policy shock, open economy, tighter-than-average financial conditions, U.S. FCI, Vector autoregression, WP

Content in this bundle

• Can Countries Manage Their Financial Conditions Amid Globalization?, WP/18/15, January 2018
  • Can Countries Manage Their Financial Conditions Amid Globalization?, WP/18/15, January 2018 (Markdown version)
  • Can Countries Manage Their Financial Conditions Amid Globalization?, WP/18/15, January 2018 (PDF)