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

68 Pages Posted: 20 Feb 2018

See all articles by Eugenio Cerutti

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Stijn Claessens

Bank for International Settlements (BIS)

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: September 2017

Abstract

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.

Keywords: Capital flows, Globalization, Monetary policy, Financial cycles, Panel analysis, Cross-country analysis, Capital market volatility, empirical; data; center; country; panel; fit; VIX; equity; bonds; FDI; credit, empirical, data, center, country, panel, fit, VIX, equity, bonds, FDI, credit, Financial Aspects of Economic Integration, Globalization: Finance

JEL Classification: F32, F36, F65, G13, G15

Suggested Citation

Cerutti, Eugenio and Claessens, Stijn and Rose, Andrew Kenan, How Important is the Global Financial Cycle? Evidence from Capital Flows (September 2017). IMF Working Paper No. 17/193, Available at SSRN: https://ssrn.com/abstract=3124375

Eugenio Cerutti (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Johns Hopkins University ( email )

Baltimore, MD 21218
United States

Stijn Claessens

Bank for International Settlements (BIS) ( email )

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CH-4002 Basel
Switzerland

Andrew Kenan Rose

University of California - Haas School of Business ( email )

Berkeley, CA 94720
United States
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510-642-4700 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/arose

NUS Business School ( email )

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National Bureau of Economic Research (NBER)

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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