Facing the Global Financial Cycle: What Role for Policy

71 Pages Posted: 9 Mar 2021

See all articles by Nicoletta Batini

Nicoletta Batini

International Monetary Fund (IMF)

Luigi Durand

Johns Hopkins University, Zanvyl Krieger School of Arts and Sciences, Department of Economics, Students

Date Written: February 2021

Abstract

Abstract In this paper we ask whether countries can influence their exposure to changes in global financial conditions. Specifically, we show that even though we can model cross-country capital flows via a global factor that closely tracks changes in global financial conditions, there is a large degree of heterogeneity in the sensitivity of each country to this same global factor. We then evaluate whether this cross-country heterogeneity can be attributed to different policy choices, including measures of capital flow management, such as capital controls and macroprudential policies. In our main results, we show that higher levels of capital controls and macroprudential policies both dampen the sensitivity to the global factor. Furthermore, we show that countries' monetary and exchange rate policies can also be successfully deployed. Overall, our results have implications that extend beyond the surge that preceded the 2008 global financial crisis, and that closely resonate in light of the financial disruptions that followed the COVID-19 pandemic.

JEL Classification: F30, F32, F42, F21, F31

Suggested Citation

Batini, Nicoletta and Durand, Luigi, Facing the Global Financial Cycle: What Role for Policy (February 2021). Available at SSRN: https://ssrn.com/abstract=3799626 or http://dx.doi.org/10.2139/ssrn.3799626

Nicoletta Batini (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Luigi Durand

Johns Hopkins University, Zanvyl Krieger School of Arts and Sciences, Department of Economics, Students ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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