Global Business and Financial Cycles: A Tale of Two Capital Account Regimes

38 Pages Posted: 31 Aug 2020 Last revised: 18 Nov 2021

See all articles by Julien Acalin

Julien Acalin

Johns Hopkins University

Alessandro Rebucci

Johns Hopkins University - Carey 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: August 2020

Abstract

Using a new equity price-based measure of the global financial cycle, this paper evaluates the relative importance of global financial shocks for quarterly equity returns and output growths in a large sample of advanced and emerging economies, as well as in South Korea and China--two countries on different sides of the trilemma triangle of international finance. We document that global financial shocks in both China and South Korea explain a substantial share of equity return variability (20 and 50 percent of the total variance, respectively), but a much smaller portion of real output fluctuations (less than 10 percent in Korea and negligible in the case of China). We also find that the combination of a closer capital account and a more rigid exchange rate regime, as in China, is associated with some costs in terms of diversification opportunities quantified by very large exposures to domestic financial and real shocks, dwarfing the contribution of any other shock in the model. More surprisingly, the combination of a relatively open capital account and a flexible exchange rate, as in South Korea, not only is associated with higher exposure to the global financial cycle than in China but also with a significant incidence of domestic financial shocks on output fluctuations.

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Suggested Citation

Acalin, Julien and Rebucci, Alessandro, Global Business and Financial Cycles: A Tale of Two Capital Account Regimes (August 2020). NBER Working Paper No. w27739, Available at SSRN: https://ssrn.com/abstract=3683615 or http://dx.doi.org/10.2139/ssrn.3683615

Julien Acalin (Contact Author)

Johns Hopkins University ( email )

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Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

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HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

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Centre for Economic Policy Research (CEPR) ( email )

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