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Handbookof International Economics: International Macroeconomics, Volume6 Editedby GitaGopinath
HarvardUniversity
Cambridge,MA,UnitedStates
ElhananHelpman
HarvardUniversity
Cambridge,MA,UnitedStates
KennethRogoff
HarvardUniversity
Cambridge,MA,UnitedStates
North-HollandisanimprintofElsevier
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Contributors JavierBianchi
FederalReserveBankofMinneapolis,Minneapolis,MN,UnitedStates
WenxinDu
UniversityofChicagoBoothSchoolofBusiness,Chicago,IL,UnitedStates
FederalReserveBankofNewYork,NewYork,NY,UnitedStates
NBER,Cambridge,MA,UnitedStates
CEPR,London,UnitedKingdom
GitaGopinath
HarvardUniversity,Cambridge,MA,UnitedStates
IMF,Washington,DC,UnitedStates
EthanIlzetzki
DepartmentofEconomics,LondonSchoolofEconomics,London,United Kingdom
OlegItskhoki
UCLA,LosAngeles,CA,UnitedStates
GuidoLorenzoni
NorthwesternUniversity,Evanston,IL,UnitedStates
MatteoMaggiori
StanfordUniversityGraduateSchoolofBusiness,Stanford,CA,UnitedStates
NBER,Cambridge,MA,UnitedStates
CEPR,London,UnitedKingdom
SilviaMiranda-Agrippino
MonetaryAnalysis,BankofEngland,London,UnitedKingdom
CEPR,London,UnitedKingdom
CfM(LSE),London,UnitedKingdom
CarmenM.Reinhart
HarvardUniversity,Cambridge,MA,UnitedStates
TheWorldBank,Washington,DC,UnitedStates
HélèneRey
DepartmentofEconomics,LondonBusinessSchool,London,UnitedKingdom
CEPR,London,UnitedKingdom
NBER,Cambridge,MA,UnitedStates
KennethS.Rogoff
HarvardUniversity,Cambridge,MA,UnitedStates
JesseSchreger
ColumbiaBusinessSchool,NewYork,NY,UnitedStates
NBER,Cambridge,MA,UnitedStates
CEPR,London,UnitedKingdom
AmirSufi
UniversityofChicagoBoothSchoolofBusiness,Chicago,IL,UnitedStates
NBER,Cambridge,MA,UnitedStates
AlanM.Taylor
DepartmentofEconomics,GraduateSchoolofManagement,Universityof California,Davis,Davis,CA,UnitedStates
NBER,Cambridge,MA,UnitedStates
CEPR,London,UnitedKingdom
Introductiontotheseries Theaimofthe HandbooksinEconomics seriesistoproduceHandbooksforvarious branchesofeconomics,eachofwhichisadefinitivesource,reference,andteachingsupplementforusebyprofessionalresearchersandadvancedgraduatestudents. EachHandbookprovidesself-containedsurveysofthecurrentstateofabranchof economicsintheformofchapterspreparedbyleadingspecialistsonvariousaspects ofthisbranchofeconomics.Thesesurveyssummarizenotonlyreceivedresultsbut alsonewerdevelopments,fromrecentjournalarticlesanddiscussionpapers.Some originalmaterialisalsoincluded,butthemaingoalistoprovidecomprehensiveand accessiblesurveys.TheHandbooksareintendedtoprovidenotonlyusefulreference volumesforprofessionalcollectionsbutalsopossiblesupplementaryreadingsfor advancedcoursesforgraduatestudentsineconomics.
KennethJ.ArrowandMichaelD.Intriligator
Preface ThisvolumeoftheHandbookofInternationalEconomicsfocusesoninternational macroeconomics,andisacompaniontoVolume5,whichfocusesoninternational trade.Thepapersinvolumes5and6bothbuildinturnontheearlierresearchfound involumes1-4.
Thepapersherereflectthebroadevolutionoftheglobalmacroeconomyandfinancialsystemoverthepastdecade.Remarkably,despitethefactthattheUnited Stateseconomywasatthecenteroftheglobalfinancialcrisis,andthatboththeEuropeanandChineseeconomiesarenowlargerbysomemeasures,dollardominance hascontinuedand,ifanything,strengthened.Thishasbeenaprominentthemeof research,asreflectedinseveralpapersinthisvolume.Atthesametime,afterseveral decadesofsteadilyincreasingglobalfinancialintegration,especiallysincethe1980s, internationalcapitalmarketfrictionshavebecomemarkedlymoreprominentleading tostrikingnewempiricalfindingsandarethinkingofexchangeratemodeling.Again, thesethemesfeatureprominentlyinseveralpapers.Last,butnotleast,thelegacyof financialcrisishasgeneratedimportantnewresearchonwhatfactorspolicymakers shouldbelookingattoanticipatesuchevents.
Ifonehadtopickthesinglemostsurprisingpost-2008empiricaldevelopmentin internationalfinance,itwouldhavetobethefactthatcoveredinterestparitythatwas onceregardedasanimmutablearbitragecondition(seeforexamplethediscussionin ObstfeldandRogoff, 1996),nolongerholdsacrossthemajorcurrencies.Thatis,itis nolongerthecasethatacoveredsyntheticdollarbondpaysexactlythesamerateof interestasaconventionaldollarbond,evenifbothinvolvedefaultfreegovernment debtandseeminglydeepfinancialmarkets.(Asyntheticdollarbondisconstructed bysellingdollarstobuyforeigncurrencyonthespotmarket,investingtheproceeds inaforeigncurrencybondwhilesimultaneouslyusingtheforwardexchangemarket tolockintodaythefuturedollarvalueoftheproceeds.)
Intheirchapteron“CIPdeviations,thedollar,andfrictionsininternationalcapital markets,”WenxinDuandJesseSchregerdocumenttheeruptionofsmallbutsignificantCIPdeviationsanddiscusspossibleexplanationsofwhytheyarenotarbitraged away.Akeyfeatureoftheirexplanationisthatpost-financialcrisisregulationshave inhibitedtheabilityoflargemultinationalbankstoarbitragedifferentialsastheydid inthepast,andwhyotherplayers,suchassovereignwealthfunds,cannotfillthe gap.Dollardominanceplaysanimportantroleintheirdiscussion.Becauseentities aroundtheworldneedaccesstodollars,possiblytoborrow,possiblyforhedgingpurposes,thisputsUSbanksandmoneymarketmutualfundsataparticularadvantage giventheiraccesstolargepoolsofretaildollardeposits.Thisremainsanactivearea, andafundamentalquestionforfutureresearchinvolvesbetterunderstandingthewelfareimplicationsofCIPdeviations,andinparticularifregulatorsshouldbeworried aboutfindingwaystoreducefinancialcrisisriskwithoutcreatingthesefrictions.The
Du-Schregerpaperalsoprovidesanexcellentintroductiontoempiricalworkoninternationalassetsmarkets,forexampleextensivelydiscussinghowtocomparereturns onbondsathorizonswhereforwardmarketsarethinordonotexist.Oneprovocativeresulttheyfeatureisthefactthatinrecentyears,themuchvaunted“exorbitant privilege”oftheUnitedStatesgovernmentinborrowingappearstofadeatlonger borrowinghorizons.Again,thisisaveryimportantquestionthatwilllikelycontinue tofuelresearch,especiallyinanerawhereUSdebtlevelsaregrowingevenfaster thanthoseofotheradvancedeconomies.
MatteoMaggiori,inhischapteron“Internationalmacroeconomicswithimperfect financialmarkets,”elegantlyillustratesabroadrangeofexchangerateandinternationalassetmarketphenomenacanbeexplainedinaunifiedframework,building inparticularontheframeworkfirstexpositedinGabaixandMaggiori(2015).Their framework,inturn,emphasizesportfoliobalancefactorsthatwereatthecenterof WilliamBransonandDaleHenderson’schapterinthefirsthandbookofinternational macroeconomicsin 1985,butgivingtheframeworkstrongermicrofoundations,in particularforthepositedfinancialfrictions.Untilrecently,thisworkhadbeensomewhatneglected,inpartbecausethesimplerDornbusch(andlaterObtsfeld-Rogoff) modelseemedmorepowerful,andinpartbecauseempiricalevidenceforportfolio balanceevidencewasrelativelythin.Butsincethefinancialcrisis,perhapswiththe riseinregulatoryfrictions,perhapsbecausemonetaryfactorshavebecomemorestable(asIlzetski,Reinhart,andRogoffnoteintheirchapterinthisvolume),therehas beenconsiderablerenewedinterest.
Althoughthemodelthechapteremploysisverysimpleandstylized,Maggiori isneverthelessabletouseitsuggestivelytocoverissuesrangingfromwhygross assetflowsseemtoimpactexchangerates,theeffectsofforeignexchangemarket intervention,thecarrytrade,theFamaregression,andtheasymmetricroleoftheUS dollar.Thechaptereconomicallysurveysalargeliteratureoneachofthesetopics. Asidefromprovidingreaderswithaveryclearexpositionwithinasingleunified framework,thepaperagainpointstotopicsforfutureresearch.Forexample,mostof theexamplesandempiricalphenomenadiscussedcanonlyprovideindirectsupport forthemodel.Itwillthereforebeusefulinfutureresearchtolookformoredirect evidence.
Althoughglobalfinancialmarketfrictionsmayhavebecomemoreprominent, neverthelessthecorrelationacrossmarketsremainsremarkable.Intheirchapteron “TheGlobalFinancialCycle,”SilviaMiranda-AgrippinoandHeleneReyshowthe strongco-movementacrossmarketsofassetpricesandinternationalcapitalflows, andhowthisrelatestoleverageandriskaversion.Thechapternotonlybuildson theirownhighlyinfluentialworkonthetopic,butbroadlysurveystheconsiderable theoreticalandempiricalliteraturethathasbuiltupsinceRey’s(2013)paperand theirjoint(2020)paper.Thefactthatthereisaglobalfinancialcyclewithapparentlyonedominantdriverisaveryconsistentfindingoftheliteraturetheysurvey. Miranda-AgrippinoandReyprovideeconometricevidencethatUSmonetarypolicy isamajordriveroftheglobalfinancialcycle,withtighteningpolicyassociatedwith higherriskaversionandaflightofcapitalfromemergingmarketsanddeveloping
economies,whilesofterUSmonetarypolicyelicitstheoppositeresults.Thereisalso acomponentofglobalriskaversionthatmovesindependentlyofUSmonetarypolicyperhapsastheauthorssuggest,becausedifferentplayershavedifferentdegrees ofriskaversion,sothatshocksthatredistributewealthcanfeedbackintoaggregate globalriskaversion.TheyfindtheeffectofECBpolicytobemuchlesspronounced. AsmallerliteratureontheimpactofpolicychangesbythePeople’sBankofChina findstheimpacttobemorenarrowlyfocused,withtighteningassociatedwithdownwardpressureoncommoditypricesandacompressionofglobaldemand.Thework surveyedinthischaptercontinuestobeanactiveresearcharea.Particularlygiven difficultiesinmeasuringmonetarypolicyinthezero-boundera,therewillnodoubt continuetobefurtherresearchontheextenttowhichmonetarypolicyisthedriver oftheglobalfinancialcyclepost2008,oritselfreactingtoit.
JavierBianchiandGuidoLorenzoni,intheirchapteron“Theprudentialuseof capitalcontrolsandforeigncurrencyreserves,”surveythegrowingliteratureonthe useof“unconventionaltools,”particularlycapitalcontrolsandforeignexchangeinterventionbyemerginganddevelopingeconomiesformacroeconomicandfinancial stability,especiallyinresponsetoexternalshockstocapitalflows.Thisisanarea wherepracticehasbeenaheadoftheory.Muchofthetheoryhasfocusedonasingle frictionandsingleinstrumenttoaddressit,butrecentadvanceshavestartedtoexplore optimalpolicyinanenvironmentwithmultiplefrictions,suchaspricingfrictionsand financialfrictionsthatgiverisetomultipleexternalities,suchasaggregatedemand externalitiesandpecuniaryexternalities.
JavierandGuidoprovideasimpleandelegantframeworktoexaminesuchan environment,includingtheroleofcapitalcontrolsandforeignexchangeintervention. Oneofthefirstshockstheyconsiderisashiftinthesupplyofloansbyinternational lenders,whichaswehavealreadydiscussed,isaprominentfeatureofthedata.They beginbyexploringtheeffectsofmonetarypoliciesandother“ex-post”policiessuch astax-subsidyoninternationalborrowing.Theythengoontocomparetheeffects ofprudentialpoliciesaimedatlimitingtheriskthathighinternationalborrowing raisestheoddsofadverselendingshifts,versuspoliciesthataimtoaddressstresses tocapitalmarketsaftertheydevelop.Theirmodelalsoallowsthemtoincorporate theliteratureonforeignreserves,whicharetypicallyexpensivetohold(sincethey requirethegovernmenttoissuemoredomesticdebtthanotherwise,typicallyata higherinterestrate.)Butatthesametime,higherreservescanbeusedtohelpdeal withshocks.Thepapergoesontousethemodelforabroadersurveyoftheliterature.
ThethemeofdollardominanceisalsocentraltothechapterbyEthanIlzetski, CarmenReinhart,andKennethRogoff,on“Rethinkingexchangerateregimes.”As theyhavearguedinpreviouswork(IRR, 2019),thechoiceofexchangerateregime, andinparticulartheanchororreferencecurrency,ismanywaysaportmanteaumeasureofthemanyissuesacountry’scentralbankfaces.Forexampleacountrymight choosetokeeparelativelystablerateagainstthedollarbecauseitsexportersare tightlyinterwoveninadollar-centricregionalsupplychain,orbecausethefinancial sectorisheavilydollarized(andthetwomaybeinterlinkedasGopinathandStein, 2021,demonstrate.)Theirpaperemploysanupdatedalgorithmanddatabaseforclas-
sifyingexchangerateandanchorcurrencychoice,toexploretheevolutionofthe globalexchangeratesystem,includingparallelrates,capitalcontrolsandreserves. Inlinewithalargerecentliterature,theyfindthatthedollarhasbecomeever-more centralasthedefactoanchororreferencecurrenciesformuchoftheworld.Indeed, bythemeasureofanchor/referencecurrencychoice,thedollarismoreprominent todaythanitwasintheheydayoftheBrettonWoodsfixedexchangeratesystemof thepost-warperiodthatcollapsedintheearly1970s.Theirdiscussionencompasses literatureonthehistoryofanchorcurrencychoice,methodsforclassifyingexchange rateregimes,adetaileddiscussionofthehistoricalevolutionofregimes,thegrowing substitutionofreservesforcapitalcontrolsasatoolforexchangeratestabilization, andthemodernTriffindilemma,thatisthefactthatthefootprintofUSprivateand publicdebttakesupaneverlargershareofglobalassets,evenastheUnitedStates economyconstitutesaneversmallershareofglobalGDP.Indoingso,itlinkstomany oftheotherchaptersinthisvolume.Thechapterconcludeswithissuessurrounding theriseofChina,andwhattriggersmightleadtheworldtomovefromsystemwhere thedollarruleswiththeeuroadistantsecond,toonewhereasignificantpartofthe dollarblockbreaksoffintoarenminbicentricblock.
Whileithasbeenknownforlongthatthedollarhasadominantroleinglobaltrade therewasscantevidenceatthegranularlevelthatdemonstratedtherealandnominal implicationsofthisphenomenon.Thedefaultinternationalmacroframeworkeither assumedsymmetricuseofcurrencies,wherebyallexporterspricedintheirowncurrencyorinthedestinationcurrency,oralternativelythatfirmsarepricetakers.Gita GopinathandOlegItskhoki,intheirchapteronthe“DominantCurrencyParadigm:a review,”surveythesubstantialrecentprogressmadewithgranulardatainourunderstandingoftheimpactofdominantcurrenciesonglobaltradeandmacroeconomic adjustmentinanenvironmentwherepricesarestickyintheircurrencyofinvoicing.
Theyshowthatdollarmovementsareprimarydriversofrelativepricesofimports andexportsandofquantitiesofgoodstradedacrossseveralcountries,evenwhenthe USisnotthecounterpartyintrade.Thismakesspilloversofshocksasymmetric,with shocksemergingfromtheUS,suchasmonetarypolicyshocks,haveamoresizable impactontherest-of-the-world,asopposedtotheotherwayround.Optimalmonetarypolicyforasmallopeneconomyisshowntosupportflexibleexchangerates eventhoughthebenefitsofthisflexibilityaremoresubduedrelativetotheMundellFlemingparadigm.Thechapteralsosurveysrecentdevelopmentsonthevariables thatdeterminecurrencychoiceandtheforcesthatgiverisetodominantcurrency equilibria.Futureresearchisneededtofurtherexploretheconsequencesofdollar movementsonglobaltrade,onoptimalpolicy,andonunderstandingtheinteraction betweentheroleofdominantcurrenciesinglobaltrade,whichthischaptercovers, andinglobalfinance,whichotherchapterscover.
Finally,AmirSufiandAlanTaylor,intheirchapteron“Financialcrises:asurvey” coverthemassiveliteratureoninternationalfinancialcrisesthathasfollowedsince thefinancialcrisis,includingtheirownworkondomesticandinternationalbankingcrises,whichinturnfollowstheearlierworksubsumedinReinhartandRogoff (2009 and 2014).Thechapterisatourdeforce,inthattheauthorsintegratedifferent
datasetsandclassificationresultsintoaunifiedempiricalframework.Thisallowsthe readertobettercompareoutcomesacrossdifferentstudies.Inlinewithworkbythe sameauthors(andtheirco-authors),andalsoearlierpre-crisisresearchbyReinhart andRogoff(2008),thepaperarguesthatsomevariables,andhousinginparticular, provideinformationthathelpspredictvulnerabilitytocrises.Comparedtotheprecrisisresearch,theauthorssurveyliteraturethatattemptstobetterseparateoutthe extenttowhichagivenfinancialcrisisiscausedbyarecessionasopposedtobeing anamplificationmechanismthatturnsarecessionintoaverydeeprecession.Aninterestingquestiongoingforward,especiallygiventhemassiveregulationputinplace afterthefinancialcrisis,iswhethera“Lucascritique”applies,andthepolicyreaction makesitmoredifficulttousepre-crisispatternstopredictfuturecrisiswiththekind ofprecisionthepost-crisisresearchargues,orwillthiscorrelationonlyexpressitself overalongerperiodwhen,asReinhartandRogoffargue,thelongregulatorycycle inevitablyrevertstoamorerelaxedstance.
Theauthorsalsoconsidermuchnewerworkthatlooksatdataonbankstocks (whereavailable)asameasureofcrisisprediction.Anotherinterestingareaofnew researchtheauthorssurveyistheextenttowhichbehavioralfactorsunderlyfinancial crises.Despiteitsbreadthandambition,thechapterisextremelyreadableandforms anexcellentsurveyoftheliteratureonadvancedeconomyfinancialcrises.
Asalwaysincuratingavolumeofthistype,spaceconstraintshaveforcedusto leaveoutsomeimportantinternationalmacroeconomicstopicswherethereareindeedexcitingrecentdevelopments.Theseinclude,forexample,theroleoffinancial globalizationinexacerbatinginequality,theimpactofthegrowingmarketincryptocurrenciesandstablecoinsontheinternationalfinancialsystem,andadvancesin theempiricalmodelingofexchangerates.Astheseliteraturesdevelop,therewillbe amplematerialtodiscussinafuturehandbook.Forthisvolume,wehavetriedto selecttopicswheretheacademicliteratureissufficientlydevelopedtobesuitablefor anencompassingsurvey,andyetresearchisstillveryactive.
GitaGopinath,ElhananHelpman,andKennethRogoff
References Branson,William,Henderson,Dale,1985.Thespecificationandinfluenceofassetmarkets.
In:Jones,R.W.,Kenen,PeterB.(Eds.),TheHandbookofInternationalEconomics,vol.2, pp.749–805.
Gabaix,Xavier,Maggiori,Matteo,2015.Internationalliquidityandexchangeratedynamics. TheQuarterlyJournalofEconomics13,69–1420.
Gopinath,Gita,Stein,Jeremy,2021.Bankingandthemakingofadominantcurrency.The QuarterlyJournalofEconomics136(2),783–830.
Ilzetzki,Ethan,Reinhart,CarmenM.,Rogoff,KennethS.,2019.Exchangearrangementsenteringthe21stcentury:whichanchorwillhold?TheQuarterlyJournalofEconomics134 (2),599–646.
Obstfeld,Maurice,Rogoff,Kenneth,1996.FoundationsofInternationalMacroeconomics. MITPress,Cambridge.
Reinhart,Carmen,Rogoff,Kenneth,2008.Isthe2007U.S.sub-primefinancialcrisissodifferent?Aninternationalhistoricalcomparison.TheAmericanEconomicReview98,339–344.
Reinhart,CarmenM.,Rogoff,Kenneth,2009.ThisTimeIsDifferent:EightCenturiesofFinancialFolly.PrincetonUniversityPress,Princeton.
Reinhart,CarmenM.,Rogoff,KennethS.,2014.Recoveryfromfinancialcrises:evidencefrom 100episodes.TheAmericanEconomicReview:PapersandProceedings104(5),50–55. Rey,Helene,2013.DilemmanotTrilemma:TheGlobalFinancialCycleandMonetaryPolicy Independence.In:ProceedingsofKansasCityFederalReserveSymposium.JacksonHole.
TheGlobalFinancial Cycle✩ SilviaMiranda-Agrippinoa,b,c andHélèneReyd,b,e,∗
a MonetaryAnalysis,BankofEngland,London,UnitedKingdom b CEPR,London,UnitedKingdom c CfM(LSE),London,UnitedKingdom d DepartmentofEconomics,LondonBusinessSchool,London,UnitedKingdom e NBER,Cambridge,MA,UnitedStates
∗ Correspondingauthor:e-mailaddress: hrey@london.edu
2.2 Globalfactorsincapitalflowsandprivatesectorcredit .......................8
3 WhatisbehindtheGlobalFinancialCycle? 15
3.1 Capitalflows&risk .................................. ................................15
3.2 TransmissionofUSmonetarypolicyacrossborders ............................17
3.3 TransmissionoftheEuropeanCentralBankmonetarypolicyacrossborders 20
3.4 TransmissionoftheBankofEnglandmonetarypolicyacrossborders .......21
3.5 TransmissionofthePeople’sbankofChinamonetarypolicyacrossborders 22
4 HastheGlobalFinancialCyclechangedafterLehman? ................................... 23
4.1 Fedunconventionalmonetarypolicy&GlobalFinancialCycle ...............24
4.2 ECBunconventionalmonetarypolicy&GlobalFinancialCycle ..............28 5 ModelsoftheGlobalFinancialCycle ......................................................... 30
6 GlobalFinancialCycle,monetaryandmacroprudentialpolicies:aresearchagenda
Wereviewtheliteratureontheempiricalcharacteristicsoftheglobalfinancialcycle andassociatedstylizedfactsoninternationalcapitalflows,assetprices,riskaversion, andliquidityinthefinancialsystem.Weanalyzetheco-movementsofglobalfactorsinassetpricesandcapitalflowswithcommodityprices,internationaltrade,and
✩ Wearegratefultotheeditors,to¸SebnemKalemli-ÖzcanandLivioStracca(discussants)andtoother participantsattheInternationalMacroeconomicHandbookConferenceforhelpfulcommentsanddiscussions.ReyisgratefultotheERCforfunding(AdvancedGrant695722).
HandbookofInternationalEconomics,Volume6,ISSN1573-4404. https://doi.org/10.1016/bs.hesint.2022.02.008 Copyright©2022ElsevierB.V.Allrightsreserved.
worldoutputaswellasthesensitivityofdifferentpartsoftheworldtotheGlobal FinancialCycle.Wepresentevidenceofthecausaleffectsofthemonetarypolicies oftheUSFederalReserve,theEuropeanCentralBank,andofthePeople’sBankof ChinaontheGlobalFinancialCycle.Wethenassesswhetherthe2008financialcrisis hasalteredthetransmissionchannelsofmonetarypoliciesontheGlobalFinancial Cycle.Finally,wediscussthetheoreticalmodelingoftheGlobalFinancialCycleand avenuesforfutureresearch.
Keywords
Monetarypolicyspillovers,Capitalflows,Commoditycycles,Risk-taking,Systemic risk
1 Introduction Financialglobalizationhasbeenrisinginthelastfiftyyears,atatimewherefinancial deregulationhasencouragedthedevelopmentofglobalbankingandcapitalmarkets. Thereisagrowingliteraturedocumentingahighdegreeofco-movementinrisky assetprices,capitalflows,leverageandfinancialaggregatesaroundtheworld,aphenomenoncalledtheGlobalFinancialCycle(GFC)inRey(2013).SincetheGFC interactswithdomesticmonetaryandfinancialconditions,itisimportanttounderstandbetteritsdriversanditscharacteristics.Aretherecertaintypesofcapitalflows whicharemorecorrelatedwiththeGFCthanothers?Howarethoseflowsrelated toleverageofintermediariesandliquiditycreationintheprivatesector?Howcan weexplaintheimportantfluctuationsinaggregaterisk-takinginworldmarkets,a phenomenonsometimescalled risk-on/risk-off behaviorbymarketparticipants?
ItiswelldocumentedthattheUnitedStatesandtheUSdollarplayamajorrolein internationalinvestment,foreignexchangereserves,andinternationalbanking,and asananchorforpricinggoodsandfinancialassets(seeforexampleGourinchaset al., 2019;Ilzetzkietal., 2019;Gopinath, 2016).Doesthisimplythatthemonetary policyoftheUSFederalReserveplaysakeyroleindrivingtheGFC?Whatisthe influenceofthecentralbanksofotherlargecurrencyareassuchastheEuropean CentralBank,thePeople’sBankofChina,theBankofEngland,ortheBankof JapanontheGFC?Theestimationofdynamicfactormodelsandtestsonthenumber ofglobalfactorsthatbestdescribethedataleadustouncovereightstrikingstylized facts:(i)Oneglobalfactoraccountsforaroundaquarteroffluctuationsinriskyasset pricesaroundtheglobe.Itishighlycorrelatedwithmeasuresofriskappetitesuchas theVIXortheVSTOXX.(ii)Twoglobalfactorsaccountforaboutthirtyfivepercent ofthevarianceofgrosscapitalflows.Thefirstglobalfactorincapitalflowsishighly correlatedwiththeglobalfactorinassetprices.Hence,weinterprettheglobalfactor inriskyassetpricesandthefirstglobalfactoringrosscapitalflowsasreflecting GlobalFinancialCycle factors;theyarelinkedinparticulartoglobalriskappetite. (iii)Globalfactorsininflowsandoutflowsarehighlycorrelatedwithoneanother, andsoaretheflowfactorsdisaggregatedbyassetclasses:portfoliobondandequity
flowsandbankingflowsinparticularco-moveanddrivetheaggregateflowfactors. FDIflowshaveasomewhatsmootherdynamics.(iv)Thesecondglobalfactorin capitalflowsishighlycorrelatedwithcommodityindices,inparticulartheoilprice, andwithinternationaltradeandworldoutput.(v)Oneglobalfactoraccountsfor aboutthirtypercentofthevarianceoffluctuationsinprivateliquidityworldwide. Thatfactorishighlycorrelatedwiththesecondcapitalflowfactor.Weinterpretthe secondcapitalflowfactorandtheprivateliquidityfactorasreflectinga GlobalTrade andCommodityCycle.(vi)TheUSFederalReserveplaysanimportantroleindriving the GlobalFinancialCycle,asmeasuredbytheglobalfactorinassetprices,thefirst globalfactorincapitalflows,measuresofriskaversion,financialconditions,spreads, andcredit.Italsoplaysaroleindrivingthe GlobalTradeandCommodityCycle (see Miranda-AgrippinoandRey, 2020b;Kalemli-Ozcan, 2019;Degasperietal., 2021). (vii)TheEuropeanCentralBank(seeCa’Zorzietal., 2020)playsaroleindriving the GlobalFinancialCycle albeitalessimportantonethantheFederalReservebut theECBmonetarypolicyisanimportantdriverofthe GlobalTradeandCommodity Cycle.ThePeople’sBankofChina(seeMiranda-Agrippinoetal., 2019)playan importantroleforinternationaltrade,output,andcommodityprices:itisadriver ofthe GlobalTradeandCommodityCycle.(viii)AftertheLehmanshockandthe implementationofunconventionalmonetarypolicies,theasymmetryininternational financialspilloversoftheECBandtheFedhasdecreased(seeMiranda-Agrippino andNenova, 2022).
Thesestylizedfactshavebeenuncoveredinmacroeconomicdata,butsomehave beenreinforcedandmademoreprecisebytheexploitationofverygranularmicroeconomicdataattheloan,bank,andfirmlevel.Recentpapersusingcreditregistry data(seediGiovannietal., 2017;Moraisetal., 2015,amongothers)cantellusa lotaboutthetransmissionofexternalfinancialconditionsanddomesticandforeign monetarypoliciesonlendingbehaviorandrisktaking.Bymatchingdataonfinancialintermediariesbalancesheetsandfirmleveldata,itispossibletotracktheeffect ofthefluctuationsintheGFContherealeconomy,andtofleshoutmoreexplicitlythetransmissionchannelsfordifferenteconomieswiththeirspecificinstitutional characteristics.
WhileempiricalevidenceontheGFChasbeengatheredfrombothmacroeconomicandgranularmicroeconomicdata,theoreticalmodelsarestillintheirinfancy. Therearestillfewmodelsabletogeneratecorrelationsingrosscapitalinflowsand outflowssuchastheonesweseeinthedata,letalonegeneratetime-varying risk-on and risk-off behaviorswithlargeassetpricingimplicationsandfluctuationsincapitalflowsaroundtheglobe.Yet,structuralmodelswillbenecessarytounderstand thejointpowerofmonetarypolicy,macroprudentialpolicy,andcapitalflowmanagement.WehavepotentiallymanytoolstotametheGlobalFinancialCycleand reinforcemonetarypolicyindependenceandfinancialstability,providedweunderstandbettertheunderlyingmechanismsoftheGFC.Thisisafascinatingareaof research.
Thepaperisorganizedasfollows.InSection 2 wereviewandupdatethemacro empiricalevidenceontheGlobalFinancialCycleinassetprices,capitalflows,and
credit.WealsodiscusstheGlobalTradeandCommodityCycle.InSection 3 we reviewtheevidenceonthedriversoftheglobalcycles,withafocusonthemonetary policyofthelargestcentralbanks.WestudyhowtheGFChasevolvedafterthe financialcrisisof2008inSection 4 anddiscussstructuralinterpretationsandmodels oftheGFCinSection 5.WeconcludebyanalyzingtheimplicationsoftheGFCfor domesticfinancialstabilityandmonetarypolicyinSection 6 anddiscussingavenues forfutureresearch.
2 Empiricalevidenceonglobalfactors 2.1 Globalfactorinriskyassetprices Kindleberger(1978)andReinhartandRogoff(2009)havedocumentedimportant andrecurringpatternsofexuberanceinassetmarketsandinlendingacrosscountries andacrosscenturies.Assetvaluationstendtoboom,leveragetendstoriseinparallel inmanyworldeconomiesandoften,thoughnotalways,thisleadstofinancialcrises asdescribedinSchularickandTaylor(2012).Highindebtednessthentranslatesin depressedaggregatedemandduringthebustasshowne.g.inMianetal.(2017). InthisHandbook,AmirSufiandAlanTaylorprovideasurveyofourknowledge onfinancialcrisesandemphasizetheimportanceofunderstandingbettertheboom phasethatprecedesthem.Theoriginofthesefinancialcycleshasbeentheobjectof muchattentionintheliterature.
Calvoetal.(1996)pointedoutthatcapitalinflowsandoutflowsintoemerging marketshaveanimportantglobalcomponent:declinesinworldrealratesencourage inflows,whileUSmonetarypolicytighteningsleadtooutflows.Lorenzoni(2014) emphasizestheimportanceofdropsinassetvaluationsandmovementsintherealexchangerateaspowerfulamplifiersoftherealeffectsofinternationalcrises.MirandaAgrippinoandRey(2020b)havemoregenerallyshowntheimportanceofglobal factorsinthetimeseriesoffinancialvariablesofalargecrosssectionofcountries bothduringcrisistimesandinnormaltimes.Theyidentifyonedimensionofthe globalfinancialcycleinthehighcorrelationacrossriskyassetpricestradedaround theworld,summarizedusingacommonglobalfactor.Intheiroriginalsetup,andin alltheanalysisthatfollows,thefactorsareestimatedusingDynamicFactorModels (DFM)thatallowfordifferentglobal,regionaland,insomespecifications,sectorspecificfactors.Thefactorsareestimatedbypostulatingthatthecross-sectionof data xt –whetherassetprices,capitalflows,orprivatecredit–,canberepresentedas thesumoftwoorthogonalcomponents,asin:
xt = ft + ξt , (1)
where ft isavectorcollectingthecommonfactors,and ξt isan n-dimensionalvector ofidiosyncraticterms,specifictothe n entriesof xt . collectsthefactorloadings, thatis,theextenttowhicheachvariablein xt loadsonthecommonfactors.The factorsareassumedtoevolvefollowingaVARprocess.Residualautocorrelationis
FIGURE1Globalfactorinriskyassetprices.
Notes :Commonfactorinworldriskyassetprices.OriginalvintageinMiranda-Agrippino andRey(2020b),sample1990:2012(dashedline),updatedvintageinMiranda-Agrippino etal.(2019),sample1980:2019(solidline).
soakedupbytheidiosyncraticterms,thatareassumedtofollowunivariateautoregressiveprocesses.Inordertodistinguishbetweencomovementsatdifferentlevels ofaggregation(e.g.attheregionallevel),block-specificfactorscanbeestimatedby imposingzerorestrictionsonsomeoftheelementsin ,suchthate.g.onlyseries thatbelongtoacertainregionareallowedtoloadononeorsomeofthefactors. ThefactorsareestimatedusingMaximumLikelihoodonstationaryandstandardized data,andthencumulated.1
IntheoriginalMiranda-AgrippinoandRey(2020b)sample,datacoveredthe componentsoftheequityindicestradedinthelargestmarketsworldwide,aswell ascommoditypricesandcorporatebonds,atmonthlyfrequencyfrom1990to2010. Thedatasupportedtheexistenceof one globalfactor,whichwasfoundtoaccount foroveraquarterofthecommonvariationinallthe838riskyassetpriceseries considered.Miranda-Agrippinoetal.(2019)extendtheanalysisbothovertime,by consideringasamplefrom1980to2019,andalongthecrosssection.Theenlargedset ofassetpricesusedforthefactorextractionisassembledwiththeintentionofbeing morerepresentativeofcompositionalchangesinglobalmarkets,particularlythrough theinclusionofAsianstocks.ThetwofactorsareplottedinFig. 1.Despitethediffer-
1 TheDFMcanbecastinstate-spaceformandestimatedusingMaximumLikelihood(seee.g.Dozet al., 2011).Thealgorithmisinitializedusingprincipalcomponents,thatprovideagoodapproximation ofthecommonfactorsinlargecross-sections.WesetthenumberoflagsinthefactorsVARto1,and thenumberofcommonfactorsfollowinganumberofcriteria(seeTable 1).Theidiosyncratictermsare modeledasindependentAR(1)processes.Theblockspecificationvariesdependingonthevariablesin xt . Forexample,forassetpriceswespecifytheblocksaccordingtothegeographicallocationofthemarkets inwhichtheyaretraded,whereasforcapitalflowswespecifythemtocapturedifferentflowstypes(e.g. portfolioflows,orFDI).Theblockspecificationdoesnothavematerialimpactontheestimationofthe globalfactors.ForadditionaltechnicaldetailsseeMiranda-AgrippinoandRey(2020b).
Table1 Numberofglobalfactors. Notes: Thefirstcolumnofthetablereportstheshareofvarianceexplainedbytheestimated factors.ThefollowingthreecolumnsreportthevalueoftheICpcriteriainBaiandNg(2002)and thelastshowsthep-valuefortheOnatski(2009)testwherethenullof r 1 commonfactorsis testedagainstthealternativeof r commonfactors.
entcomposition,thetwofactorsareverysimilarovertheoverlappingsample,with acorrelationof0.896.Since2010,thefactorpicksupimportantglobaleventssuch astheEuropeansovereigndebtcrisis;theglobalequitysell-offofthebeginningof 2016triggeredbyfearsthattheChinesegrowthslowdownmayhavespiraledoutof controlandbythedramaticplungeinoilprices;andtheslowdownattheendof2018, whichsomecommentatorsattributetothecombinedeffectofthewithdrawalofsome monetarystimuli,andtotheescalationintheUS-Chinatradeconflict.Finally,and similartotheoriginalestimates,thedatasupporttheexistenceof one globalfactor, whichaccountsforaboutaquarteroftheoverallcommonvariationinthisextended sample(Table 1).
Fig. 2 reportstheaveragefactorloadingsacrosscountriesandassetclasses.Very interestingly,theloadingsareremarkablyhomogeneous,andriskyassetpricesall loadpositivelyontheglobalfactor,andtoaverysimilardegree.Therearehowever someinterestingdifferences.Globalcommoditypriceshavethesmallestloadings; thisisconsistentwiththepresenceofapotentiallydifferentcommoditycycle,somethingweelaborateonbelow.Inrelativeterms,Europeanstocksdisplaythelargest sensitivitytothecommonfactor,whetherintheeuroareaoroutside,whileAsian andLatinAmericanmarketstendtoberelativelylessexposed.2
AsshowninTable 3 theglobalfactorextractedfromriskyassetpricesishighly correlatedwiththeVIX,theVSTOXX,andmeasuresofriskaversiontakenfrom Bekaertetal.(2019)(BEX),Bekaertetal.(2013)(BHD)andCrossBorderCapital’s dataforriskappetite(CBC).HabibandVenditti(2019)alsofindsthatacommon componentinglobalassetpricesiscloselyrelatedtotheVIXandtheriskpremium oncorporatebonds.Wethereforereportthefollowingstylizedfact:
2 Geographicalregionsincludethefollowingcountries.Europe: Austria,Belgium,Denmark,Finland, France,Germany,Ireland,Italy,Netherlands,Norway,Spain,Sweden,Switzerland,UnitedKingdom. NorthAmerica: Canada,UnitedStates.LatinAmerica: Brazil,Chile,Colombia,Mexico.AsiaPacific: HongKongSAR,Japan,Korea,Singapore,Taiwan.Australia: Australia.
FIGURE2Globalfactorinriskyassetprices:factorloadings.
Notes :Averagefactorloadings(×100)acrosscountriesandassetclasses.Estimationsample:1980:2019.
StylizedFact1 GlobalFinancialCycle:Oneglobalfactorinriskyassetprices,correlatedwithglobal riskappetite,explainsaboutaquarterofthevarianceofthedata.
AsnotedinRey(2013),however,assetpricesareonlyoneofthedimensions alongwhichglobalfinancialcyclescanbemeasured.Globalcapitalflowsalsoexhibitstrongdegreesofcomovement.BarrotandServén(2018)estimateglobalfactors forannualgrosscapitalinflowsandoutflowsforapanelof85countriescoveringthe years1979-2015.Theyfindthatcommonfactors,whichincludeaglobalfactoranda countrygroupfactor(advanced,emerginganddevelopingeconomies),explainclose tohalfoftheoverallvariationofflowsforallcountries;butthatthereareimportant differences.Inparticular,globalfactorsaccountforalargershareofthevariancefor advancedeconomiesthanforemergingmarkets(anddevelopingeconomies).They alsoshowthatoutflowsacrossallcountriestendtodependonglobalfactorsmore thaninflowsdo,suggestingthatasignificantshareofthevariationinglobalflows maybeduetolargeoutflowsfromarelativelylargenumberofcountriesintoarelativelysmallernumberofcountries.AhandfulofglobalvariablessuchastheVIX, theUSinterestrate,theUSrealexchangerate,USrealGDPgrowthandaworld commoditypriceindexarefoundtoexplainmuchofthevarianceintheestimated factors.Ceruttietal.(2017)explorestheimportanceofglobaldriversofinternationalcapitalflowsbyfocusinginparticularonmeasuresofgoodnessoffit.Unlike BarrotandServén(2018),theyestimatedifferentglobalfactorsfordifferenttypesof capitalflows–i.e.foreigndirectinvestment,portfolioequityanddebt,andbanking flows–for85countriesovertheperiod1990-2015atthequarterlyfrequency;they donotestimatecountrygroupspecificfactors.TheirsamplealsodiffersfromBarrot
andServén(2018)inthattheyincludetwentyformersocialisteconomiesbutomitsix emergingmarketsandtwenty-fourdevelopingcountries(mainlyinAfrica).Theauthorsshowsignificantdegreesofheterogeneityacrossflowtypesandcountries,and overallsharesofexplainedvariancethatarelowerthanthosereportedintheliterature.TheexistenceofaGlobalFinancialCycledoesnotimplythatallcountriesand flowsbeexposedtoitinthesamewayandtothesameextent,whichisconfirmedby theheterogeneityandtime-variationinthefactorloadingsthatemergesfrommostof thestudies.Davisetal.(2019)exploretheglobaldeterminantsofbothgrossandnet capitalflows.Usingannualdatafor58countriesovertheperiod1996-2015,Davis etal.(2019)estimateafactormodelforthejointdynamicsofbothinflowsandoutflows.Thisstrategyallowsthemtoanalyzethecharacteristicsofbothgrossflows (definedasinflowsplusoutflows)andnetflows(definedasoutflowsminusinflows). Theyfindevidenceoftwomainfactorscharacterizingthedynamicsofglobalgross flows,thatareabletocaptureover40%oftheirvariation.Twofindingsstandout. First,thesamefactorsalsoaccountforabout40%ofthecommonvariationin net flowsinbothadvancedandemergingmarketeconomies.Thisisimportantbecause itsuggeststhatthesamefactorsthatdrivefluctuationsingrossflowsalsoinduce variabilityinnetflows,thelatterbeingamoredirectleadingindicatorofdomestic businesscycles.Thisisdespitethefactthatovertimethecorrelationbetweeninflows andoutflowshasincreased,asnotedinForbesandWarnock(2012).Second,thefirst factoringlobalcapitalflowscorrelatesstronglywiththeglobalfactorinassetprices ofMiranda-AgrippinoandRey(2020b)despitethetwobeingextractedfromcompletelydifferentsetsofdata.Thisobservationsuggeststhatglobalfinancialprices andquantitiessharethesameunderlyingdriverstoalargeextent.Thisreinforcesthe notionofGlobalFinancialCyclesbeingacomprehensivephenomenonthataffects differenttypesoffinancialvariables.
2.2 Globalfactorsincapitalflowsandprivatesectorcredit Weexplorecommonfactorsincapitalflowsandprivatesectorcreditinwhatfollowsusingquarterlyandmonthlydata(seeMiranda-Agrippinoetal., 2019).Weuse quarterlydatadistributedbytheIMFandconsiderbothinflowsandoutflowsacross differenttypes,namely,FDI,portfolio(equityanddebt),andother(banking)flows. Oursamplecovers81countriesfrom1990to2018.Allcapitalflowsdataarescaled byGDP.Weestimatethecommonfactorsusingadynamicfactormodelsimilarto thatemployedforassetprices,thatallowsustodistinguishbetweenglobalandgroupspecificfactors,wheregroupsaredefineddependingeitheronthetypeanddirection offlows,oronthecountryclassificationasadvancedoremergingmarketeconomy. Theestimationofthecommonglobalfactorsisrobusttothesealternativegroupspecifications.
SimilartoDavisetal.(2019),wealsofindevidenceoftwoglobalfactorsfor capitalflows(seeTable 1 wherewetestforthenumberoffactors).Inannualdata, Davisetal.(2019)foundthatthosetwofactorscaptureover40%ofthevariation. Inquarterlydata,wefindthatthetwofactorstogetheraccountforoverathirdofthe
FIGURE3Globalfactorsinassetpricesandcapitalflows.
Notes :[LeftPanel]Globalfactorinriskyassetpricesagainstfirstglobalfactorincapital flows.[RightPanel]Globalfactorinriskyassetpricesagainsttotalinflowsandoutflows.
variation.Thisisnaturalasswitchingtoquarterlyobservationssomewhatreducesthe shareofexplainedcommonvarianceduetothehighervolatilityofthedata.Thisis howevertheonlydifferencerelativetotheirfindings.Importantly,weconfirmthat thefirstcommonfactorincapitalflowsisstronglycorrelatedwiththeglobalfactor inassetprices,despitethetwobeingestimatedfromcompletelydifferentdata.This isclearlyvisibleinFig. 3 (leftpanel),andthecorrelationbetweenthetwofactors isequalto0.815(Table 3).InFig. 3 (rightpanel)weestimateseparatelythefirst globalfactorsininflowsandoutflowsandfindthattheyarebothhighlycorrelated withtheglobalfactorinassetprices.Thisfindingofco-movementbetweenquantity andpricesisoffirst-orderimportanceforinternationalfinancemodels.
Weexploreindetailthedegreeofheterogeneityacrossinflowsandoutflowsand acrossflowtypesbyrepeatingthefactorextractionondifferentcutsofthedataand selectingeachtimethefirstcommonglobalfactor.Tohighlightthedifferentdirectionsofflows,werotatetheoutflowfactorsbypre-multiplyingthemby 1.3 Fig. 4 reportsalltheextractedglobalfactorsfordifferenttypesofinflows(leftpanel)and differenttypesofoutflows(rightpanel)forallthecountriesinoursample.Pairwise correlationcoefficientsforallpairsarereportedinTable 2.Afewresultsstandout. First,globalfactorsforgrossinflowsandgrossoutflowscorrelatealmostperfectly (correlationequalto0.952),whichconfirmsresultsinbothForbesandWarnock
3 Factorsareidentifieduptoascale,thereforetherotationdoesnotaffecttheirestimation.Rotatingthe factorsalsorequiresrotatingtheloadings,hencetheoutflowsfactorsarenegativelycorrelatedwithtotal outflows.
FIGURE4Globalfactorsacrosstypesofcapitalflows.
Notes :[LeftPanel]Globalfactorforallinflows(solidline),allFDIinflows(dash-dottedline), allportfolioinflows(debt+equity,dashedline),andotherinflows(dottedline).[Right Panel]Oninvertedscale,globalfactorforalloutflows(solidline),allFDIoutflows(dashdottedline),allportfoliooutflows(debt+equity,dashedline),andotheroutflows(dotted line).
Table2 Correlationsamongcapitalflowsfactors.
Notes: Pairwisecorrelationcoefficients.Outflowsfactorsarerotated(i.e.premultipliedby 1)tohighlightthedifferentdirectionofflows.Sample1990-2018.
(2012),Broneretal.(2013)andDavisetal.(2019).Second,thereisstrongevidence pointingtocommonsourcesofvariationforalltypesofcapitalflowsirrespective ofthedirection.Resultsinthetablerevealthattheonlyexceptionisrepresentedby FDIs,forwhichthecorrelationwithotherflowstendstobelower,albeitsignificant. ThisisalsovisibleinthesubplotsofFig. 4.FDIflows,depictedwithorangedashdottedlines,tendtobegenerallylessvolatilethanotherflows,andsomewhatlagging.
ThedifferentbehaviorofFDIsisalsohighlightedinCeruttietal.(2019),whonote thatbanking,portfoliobondandequityinflowsdrivemostofthecomovementin grossinflows,particularlyforEMEs.
StylizedFact2 Twoglobalfactorsaccountforaboutthirtyfivepercentofthevarianceofgrosscapital flows.Thefirstglobalfactorincapitalflowsishighlycorrelatedwiththeglobalfactor inassetprices.Weinterprettheglobalfactorinriskyassetpricesandthefirstglobal factoringrosscapitalflowsasreflecting GlobalFinancialCyclefactors.
StylizedFact3 Globalfactorsininflowsandoutflowsarehighlycorrelatedwithoneanotherandso aretheflowfactorsdisaggregatedbyassetclasses:portfoliobondandequityflows andbankingflowsinparticularco-moveanddrivetheaggregateflowfactors.FDI flowshaveasmootherdynamics.
Takentogether,theseresultsindicatethatwhilethereexistssomedegreeofheterogeneityacrossdifferenttypesofflows,worldriskyassetpricesandinternational capitalflowsseemtosharethesameunderlyingglobaldrivers.Thesecommon drivers,summarizedbytheglobalfactors,alsoexplainanimportantshareofvariationofthedata,suggestingthatGlobalFinancialCyclesplayasignificantrolein characterizingfluctuationsinthesevariables.
Finally,weexplorecommonvariationinprivatecreditatthegloballevel.Weestimatecommonglobalfactorsfromtwodifferentdatasets.Thefirstoneismonthly,and distributedbyCross-BorderCapital(CBC)Ltd.ThevariableweuseisPrivateSectorLiquidity,definedasthenetcreditgenerationofallcreditproviders,traditional commercialbanksand‘shadowbanks’.Thedataaremonthlyandcover72countries overtheperiod1980-2019.4 TheseconddatasetisobtainedfromtheInternationalFinancialStatisticsdatasetmaintainedbytheIMFanditisquarterly.Thevariableused isClaimsonPrivateSector(IFSseriescodeFOSAOP)fromtheMonetary,Other DepositoryCorporationsSurvey,extendedbackintimeusingtheMonetary,BankingInstitutionsSurvey(IFSline22D).Thesedatarecorddomesticbanklendingto theprivatenon-financialsector,i.e.corporatesandhouseholds.RelativetotheCBC data,theIMFdatadonotincludelendingfromshadowbanksandlong-termdebt securities.Weusethesamesetofcountriesandsametimecoverage.5
Asinthecaseofassetprices,wefindevidenceofoneglobalfactorforprivate creditvariablesacrossthedifferentdatasets.Thetwodatasetslargelycapturethe sametypeofinformation.Atthequarterlyfrequency,wefindthattheglobalcredit factorextractedfromtheIMFdatacorrelateswiththeglobalfactorinassetpricesand thetwocapitalflowfactorsthoughthecorrelationsarenotverystrong.Onceweaggregatethemonthlyprivateliquiditydatatoeitherquarterlyaverageorendofquarter
4 Foradetaileddescriptionofthedataandadditionalstylizedfacts,seeHowell(2020).
5 Thequarterlyleveldataareinterpolatedusingashape-preservingpiecewisecubicinterpolationtocomputemonthlycorrelations.
Table3 Correlationamongglobalfactors.
Notes: Pairwisecorrelations,overlappingsamplesfrom1990:01-2018-12.Variablesinlevels. Italicfiguresdenotesignificanceat10%level, † isfornot-significantcorrelations,allremaining entriesaresignificantatleastatthe5%level.MeasuresofriskaversionaretakenfromBekaert etal.(2019)(BEX),Bekaertetal.(2013)(BHD),andCrossBorderCapital’sdataforriskappetite (CBC).MeasuresofworldoutputarefromBaumeisterandHamilton(2019)(BH)andfromthe CPBNetherlandsBureauforEconomicPolicy(NRB).TheFCIisfromCrossBorderCapital.
readings,wefindthattheextractedfactorisverysimilartothatextractedfromthe IMFdata.Theglobalfactorinprivateliquidityatthemonthlyfrequencycorrelates stronglywiththesecondfactorincapitalflows,andthe GlobalCommodityandTrade Cycle (Table 3 andFig. 5).Davisetal.(2019)andBarrotandServén(2018)alsofind thattheirsecondcapitalflowfactorcorrelatesstronglywithcommodityprices.
StylizedFact4 Thesecondglobalfactorincapitalflowsishighlycorrelatedwithcommodityindices andwithinternationaltradeandworldoutput.
FIGURE5Capitalflows,privateliquidity,andcommoditycycles.
Notes :[LeftPanel]Secondglobalfactorincapitalflows(alldirections,alltypes,solidline), commoditypriceindex(dash-dottedline),oilprice(dashedline).[RightPanel]Second globalfactorincapitalflows(alldirections,alltypes,solidline),globalfactorinworldprivateliquidity(dash-dottedline).
StylizedFact5 Oneglobalfactoraccountsforabout31percentofthevarianceoffluctuationsin privateliquidityworldwide.Thatfactorishighlycorrelatedwiththesecondcapital flowfactor.Weinterpretthesecondcapitalflowfactorandtheprivateliquidityfactor aslinkedtothe GlobalTradeandCommodityCycle.
Fig. 6 reportstheaverageloadingsacrosscountriesforthefirstandthesecond globalfactorsincapitalflows.Theaveragesdisplayedarecalculatedacrossallflows, butwediscussbelowdifferencesbetweeninflowsandoutflows,oramongflowstypes wheneverrelevant.Inthefigurewedistinguishamongbroadgeographicalareasas wellasbetweenAEandEMEs,followingtheIMFclassification.6 Lookingatthe toppanelofFig. 6 weseethatcapitalflowsinadvancedeconomiesoftheEuro
6 Geographicalareasincludethefollowingcountries.EuroArea: Austria,Belgium,Croatia,Cyprus,Estonia,Finland,France,Germany,Greece,Ireland,Italy,Latvia,Lithuania,Luxembourg,Malta,Netherlands, Portugal,SlovakRepublic,Slovenia,Spain.NorthAmerica: Canada,UnitedStates.LatinAmerica: Argentina,Brazil,Chile,Colombia,CostaRica,Ecuador,ElSalvador,Guatemala,Mexico,Panama,Peru, Uruguay,Venezuela.AsiaPacific: HongKongSAR,Indonesia,Japan,Korea,Malaysia,Philippines,Singapore,Thailand.Australia: Australia,NewZealand.Asia: Bangladesh,China,India,Mongolia,Pakistan, SriLanka.OtherEurope: Albania,Belarus,BosniaandHerzegovina,Bulgaria,CzechRepublic,Denmark, FYRMacedonia,Hungary,Iceland,Montenegro,Norway,Poland,Russia,Serbia,Sweden,Switzerland, UnitedKingdom.MiddleEast: Armenia,Azerbaijan,Georgia,Israel,Jordan,Kazakhstan,Lebanon,Saudi Arabia,Turkey.Africa: Mauritius,Morocco,Namibia,SouthAfrica.
FIGURE6Globalfactorscapitalflows:loadings.
Notes :Averageloadings(×100)forthetwofactorsincapitalflowsacrosscountries.DistinctionbetweenAdvancedandDeveloping/EmergingMarketEconomies.Sample19902018.
Area,otherEurope,andNorthAmericahavethehighestloadingsonthefirstfactor. ThisisalsotrueforIsrael,whichistheonlycountryclassifiedasAEintheMiddle Eastgroup.Ingeneral,AEstendtohavehigherloadingsonthefirstfactorrelative toEMEs,whileflowstoandfromAsianandAfricaneconomieshavethelowest exposuretotheGFC.TheloadingsontheGFCfactorarealwayspositive,irrespective ofthetypeofflows,thegeographicallocation,ortheclassificationasAE/EME.
Thepictureisquitedifferentforthesecondfactor,whichwehaveinterpretedas capturing GlobalTradeandCommodityCycles (GTCC).Thebottompanelofthe pictureshowsthatAsiancountrieshavethehighestloadings(EMEAsiabeingdominatedbyChina),moreover,withtheexceptionofAsiaPacific,itistypicallyflows toandfromEMEsthattendtohavehigherloadingsrelativetoAEs.Infact,inflowstoEuropeanAEsloadnegativelyonthissecondfactor.EquityflowstoAfrican economiesalsoloadstronglyandnegativelyontheGTCCfactor,whilethepattern displayedinFig. 6 isbroadlyrepresentativeofallothertypesofflows.Bankingflows inAEsinEurope,NorthAmerica,andAustraliadonotloadsignificantlyonthissecondfactor,whileontheotherhandFDIflowsintoAfrica,AsiaandforAEsinAsia PacificandtheMiddleEastloadstronglyandpositivelyontheGTCC.
Table 3 showsthattheglobalfactorinriskyassetpricesandthefirstglobalfactor incapitalflows(F1)correlatehighlywithoneanotherandwithriskappetiteandthe worldfinancialconditionindex(FCI).Incontrast,thesecondglobalfactorincapitalflows(F2)correlatesstronglywithprivateliquidity,exchangerates,andworld output,tradeandcommodityprices,asisalsoclearfromFig. 5.Onepossibleinter-
pretationoftheseresultsisthatascommoditypricesandinternationaltradeactivity goup,EMsofLatinAmericaandtheMiddleEastwhichtendtobecommodityexportersandAsianeconomies,whichtendtoengageheavilyininternationaltrade,are increasinglyinvolvedininternationalfinancialflows:duetoscarceinvestmentopportunitiesathometheirexcesssavingsarechanneledabroad.Thisisaccompanied byinvestmentinasubsetofcountrieswheretheseexcesssavingsmigrate.Thisinterpretationwouldbetoalargeextentreminiscentoftherecyclingofthepetrodollarsin the1970s,whichledtocreationofliquidityintheUSbankingsystemandmassive capitalflowsintoLatinAmerica.SincebankingflowsofAEshoweverdonotseemto loadmuchonthisglobalfactor,itseemsthatthistimearound(dataarepost1990s), investmentoccursmainlythroughFDIandportfolioflowsintosomeEMsandsome AEs.Nowadays,itislikelythatChinaplaysakeyroleinthecommoditycycleand thatepisodesofhighcommoditypricescoincidewithstronggrowthininternational tradeandindustrialoutput.
3 WhatisbehindtheGlobalFinancialCycle? 3.1 Capitalflows&risk Theimportanceofinternationalmonetaryspilloversandoftheworldinterestratein drivingcapitalflowsandcreditboomsandbustshasbeenpointedoutintheclassic workofCalvoetal.(1996).Thisliteraturetypicallyreliesonpanelregressionsat thecountryleveltoinvestigatetherelativecontributionofglobal(push)andcountryspecific(pull)factorsindrivingcapitalflows.Fratzscher(2012)showsthatcommon factors,suchasglobalrisk(proxiedbytheVIX),dominatedthedynamicsofnetcapitalflowsupuntilthe2008financialcrisis,withheterogeneouseffectsacrossdifferent countries.Similarly,ForbesandWarnock(2012)showthatglobalfactors,especially globalrisk,aresignificantlyassociatedwithextremecapitalflowepisodes.Financialcontagion,whetherthroughtrade,banking,orgeography,isalsoassociatedwith sharpdecreasesinbothgrosscapitalinflowsandoutflows,whilelocalfactorsare generallylessimportant.TheseresultsalignwiththoseinBarrotandServén(2018), whofindthatahandfulofglobalvariables,includingtheVIX,theUSinterestrate andrealexchangerate,drivemostofthecommonvariationingrosscapitalinflows andoutflows.Miranda-AgrippinoandRey(2020b)showsthattheglobalfactorin riskyassetpricesandtheVIXandothermeasuresofriskaversionarehighlycorrelated(seeFig. 7).Assetpricesboomwhenriskaversionandvolatilityislowand viceversa(seePassariandRey, 2015).Cesa-Bianchietal.(2020)showthattime variationsincountry-specificvolatilityareexplainedlargelybyshockstoaglobal financialfactorandexploreindetailthecorrelationsbetweenvolatilityandgrowth. CaggianoandCastelnuovo(2021)presentsevidencethatglobalfinancialuncertainty shockshaveastrongereffectonworldoutputwhenglobalfinancialconditionsdeteriorate.
Kalemli-Ozcan(2019)findsstrongevidencethatUSmonetarypolicyaffects globalinvestors’sriskperceptionstherebytransmittingitselftodomesticcreditcosts.
