International Financial Flows and the Global Financial Cycle

IMF Economic Review (2018). DOI/10.1057/s41308-018-0072-6

Posted: 9 Apr 2019

See all articles by Patrick McGuire

Patrick McGuire

Bank for International Settlements (BIS)

Mary Amiti

Federal Reserve Bank of New York

David E. Weinstein

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 10, 2018

Abstract

What is the role for supply and demand forces in determining movements in international banking flows? And what role might a common factor — the global financial cycle highlighted by Rey (Dilemma not trilemma: the global financial cycle and monetary policy independence, 2018) and others — play in movements in these flows? Answering these questions is crucial for understanding the international transmission of financial shocks and formulating policy. This paper addresses them by using the method developed in Amiti and Weinstein (J Polit Econ 126(2):525–587, 2018) to exactly decompose the growth in international bank credit into common shocks, idiosyncratic supply shocks and idiosyncratic demand shocks for the period 2000–2017. A striking feature of the global banking flows data can be characterized by what we term the “Anna Karenina Principle”: all healthy credit relationships are alike, and each unhealthy credit relationship is unhealthy in its own way. During non-crisis years, bank flows are well explained by a common global factor. But during times of crisis, flows are affected by idiosyncratic demand shocks to borrower countries and by supply shocks to their creditor banks. That is, the importance of the common component seems to vary over time. This has important implications for why standard econometric models break down during crises.

Suggested Citation

McGuire, Patrick M. and Amiti, Mary and Weinstein, David E., International Financial Flows and the Global Financial Cycle (August 10, 2018). IMF Economic Review (2018). DOI/10.1057/s41308-018-0072-6. Available at SSRN: https://ssrn.com/abstract=3354031

Patrick M. McGuire (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Mary Amiti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

David E. Weinstein

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
MC 3308
New York, NY 10027
United States
212-854-6880 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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