Facing the Global Financial Cycle: What Role for Policy

February 12, 2021

Preview Citation

Format: Chicago

Nicoletta Batini, and Luigi Durand. Facing the Global Financial Cycle: What Role for Policy, (USA: International Monetary Fund, 2021) accessed December 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Capital controls, Capital flow surges, Capital flows, Capital inflows, Exchange rates

Keywords: Capital flow data, Capital flow episode happening, Capital flow surge episode, Capital flows shock, GFCy spillover, Global Financial Cycle, IMF Institutional View., Macroprudential Policy, Surge episode, WP

Publication Details

Pages:

70
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/034
Stock No:

WPIEA2021034
ISBN:

9781513569451
ISSN:

1018-5941

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