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Has the Global Financial Cycle Changed Since the Crisis?

Paper Session

Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)

Marriott Marquis, Grand Ballroom 2
Hosted By: American Economic Association
  • Chair: Silvia Miranda-Agrippino, Bank of England and Northwestern University

Do Sounder Banks Make Calmer Water? The Link Between Bank Regulations and Extreme Capital Flow Episodes

Kristin Forbes
,
Massachusetts Institute of Technology

Abstract

This paper tests if prudential and macroprudential reforms have meaningfully reduced the incidence of capital flow “waves”, i.e., of sudden stops and surges of capital flows from abroad. The results support other work documenting changes since 2008 in how global factors affect capital flows, but finds mixed evidence on how regulations have affected the incidence of sharp capital flow movements. Prudential regulations (such as higher capital-asset ratios) meaningfully reduce the incidence of surges, but tighter macroprudential regulations appear to have done little to reduce the incidence of capital flow waves—and if anything—are often correlated with an increased risk of sudden stops. This may reflect their limited use to date, or their different effects on different types of capital flows. Macroprudential regulations may have made banks (and bank flows) more resilient, but shifted financial intermediation outside the regulated sector and thereby increased the risk of sharp movements in debt and equity flows. These reforms could still provide important benefits, however, in terms of mitigating the negative effects of these capital flow waves on the broader economy. Even if the waters are not much calmer, the waves should do less damage.

Cross-border Spillovers: How US Financial Conditions affect Mergers and Acquisitions Around the World

Sanhitha Jugulum
,
University of Chicago
Prachi Mishra
,
Goldman Sachs
Raghuram Rajan
,
University of Chicago

Abstract

We show that financial conditions in the United States have significant spillover effects on mergers and acquisitions in both advanced and emerging economies. On average, a 100 bp easing of the IMF US Financial Conditions Index is associated with 15.7% higher value of mergers and acquisitions as a share of a country’s GDP, relative to its mean. The spillovers are stronger for more open economies, and for countries with a higher degree of foreign exchange indebtedness.

Anatomy of the Global Financial Cycle

Helene Rey
,
London Business School
Silvia Miranda-Agrippino
,
Bank of England

Abstract

Rey (2019) documented the existence of a “global financial cycle” in capital flows, asset prices and in credit growth. This cycle moves with measures of uncertainty and monetary policy in the US. The existence of this global financial cycle means that the international trilemma no longer exists—and is instead a dilemma or “international duo”—that independent monetary policies are possible if and only if the capital account is managed. Several papers have suggested that the global financial cycle has weakened since 2008 and that international trilemma is still alive and well. We update our earlier work to test if the cycle has changed.

Nowcasting Economic Activity with Indicators of Global Financial Conditions

Burcu Erik
,
Bank for International Settlements
Marco Lombardi
,
Bank for International Settlements
Dubravko Mihaljek
,
Bank for International Settlements
Hyun Song Shin
,
Bank for International Settlements

Abstract

Purchasing Managers’ Indices (PMIs) provide timely information on economic activity at a much higher frequency than can otherwise be obtained from accounting data. This makes PMIs suitable for nowcasting GDP. We show that financial variables such as the broad dollar exchange rate contain real-time information on PMIs and on economic activity. One possible channel is through forward-looking survey responses, especially in firms that are part of global supply chains. We also examine how these relationships have changed since 2008.
Discussant(s)
Livio Stracca
,
European Central Bank
Eduard Levy-Yeyati
,
University of Torcuato Di Tella
JEL Classifications
  • F3 - International Finance
  • F6 - Economic Impacts of Globalization