Global drivers of gross and net capital flows

Davis, Scott; Valente, Giorgio; Wincoop, Eric van

doi:10.1016/j.jinteco.2020.103397

Cited by 48 publications

(13 citation statements)

References 29 publications

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“…One research direction refers to quantifying the global financial cycle. Davis et al (2021) find that the global financial cycle and commodity price factor account for half of the variance of gross flows in advanced countries and forty percent of the variance of gross flows in emerging countries. By contrast, Cerutti et al (2017) provide empirical evidence supporting the fact that the role of the global financial cycle is limited, smaller than typically implied in literature.…”

Section: Literature Reviewmentioning

confidence: 94%

External Shocks Pass-Through Into Selected Central and Eastern European Countries

Necula

Murarașu

Radu

et al. 2022

Technological and Economic Development of Economy

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The ongoing COVID-19 pandemic put further pressure on the economies, both at individual and global level and, amid already existing vulnerabilities, worsened the economic prospects. As a result of the negative effects of these tensions in tandem with global value chains disruptions, commodities’ prices increased, leading to strong inflationary pressures around the globe. Given possible permanent effects on inflation expectations, it is therefore questionable how fast those prices are to be stabilized. In this context, this paper focuses on a group of 10 European countries, namely Czechia, Hungary, Poland, Romania, France, Germany, Italy, Spain, the Netherlands and the United Kingdom, in the period spanning from 2005 to 2020. By implementing a GVAR model, the study analyses the pass-through of the external shocks stemming mainly from the Euro Area and the US to the CEE region, comparing the responses obtained for these countries with the ones of the developed economies. Considering the strong trade relationships between the analysed countries, the considered transmission channel is the commercial one. The results indicate that a supply shock in the Euro Area has a significant negative impact on the selected CEE countries’ economic growth, the offsetting factors not being strong enough to diminish the response.

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Section: Literature Reviewmentioning

confidence: 94%

External Shocks Pass-Through Into Selected Central and Eastern European Countries

Necula

Murarașu

Radu

et al. 2022

Technological and Economic Development of Economy

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“…Facts 3 and 4 are related to findings byDavis et al (2021b). They show that net capital outflows load positively on the product of the GFC and the net foreign asset position in safe assets, but do not depend on the product of the GFC and the net foreign asset position in risky assets.…”

mentioning

confidence: 66%

“…2 This capital flow factor is in turn highly correlated with the MAR asset price factor. 3 Davis et al (2021b) also find that the same global factor accounts for 21 percent of the variance of net capital flows. 4 There is also plenty of evidence that the global financial cycle accounts for a significant portion of the co-movement of risk higher returns in good times (net wealth transfer from other countries) and experiences worse returns in bad times (net wealth transfer to other countries).…”

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confidence: 87%

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A Theory of the Global Financial Cycle

Davis

Wincoop

2021

gwp

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We develop a theory to account for changes in prices of risky and safe assets and gross and net capital flows over the global financial cycle (GFC). The multi-country model features global risk-aversion shocks and heterogeneity of investors both within and across countries. Within-country heterogeneity is needed to account for the drop in gross capital flows during a negative GFC shock (higher global risk-aversion). Cross-country heterogeneity is needed to account for the differential vulnerability of countries to a negative GFC shock. The key vulnerability is associated with leverage. In both the data and the theory, leveraged countries (net borrowers of safe assets) deleverage through negative net outflows of risky assets and positive net outflows of safe assets, experience a rise in the current account and a greater than average drop in risky asset prices. The opposite is the case for non-leveraged countries (net lenders of safe assets).

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“…See e.g Frankel and Rose (1996),Bussiere and Fratzscher (2006),Rose and Spiegel (2011),Frankel and Saravelos (2012),Gourinchas and Obstfeld (2012),Catão and Milesi-Ferretti (2014),Eichengreen and Gupta (2015),Ahmed, Coulibaly, and Zlate (2017),Davis, Valente, and van Wincoop (2021). …”

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confidence: 99%

"The Global Financial Cycle and Capital Flows During the COVID-19 Pandemic"

Davis¹,

Zlate²

2022

gwp

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We estimate the heterogeneous effect of the global financial cycle on exchange rates and cross-border capital flows during the COVID-19 pandemic, using weekly exchange rate and portfolio flow data for a panel of 59 advanced and emerging market economies. We begin by estimating a global financial cycle (GFC) index at the weekly frequency with data through the end of 2021, and observe an outsized decline in the index over a period of just four weeks during February and March 2020. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the GFC. We show that the ability of the GFC to explain fluctuations in exchange rates and capital flows increased dramatically during the pandemic crisis. By using the law of the total variance we are able to decompose a panel of country-specific exchange rate or capital flow series into the time-series variance of the cross-sectional mean and the cross-sectional variance around that mean. We show that the GFC mainly explains the time-series variance of the crosssectional mean. In addition, during the pandemic crisis like the COVID pandemic in 2020, relevant high-frequency indicators such as the weekly changes in cases and vaccination rates, which varied in timing and intensity across countries, improve the cross-sectional fit of our model by just as much as standard macroeconomic fundamentals such as the current account, reserves, and net foreign assets.

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Global drivers of gross and net capital flows

Cited by 48 publications

References 29 publications

External Shocks Pass-Through Into Selected Central and Eastern European Countries

External Shocks Pass-Through Into Selected Central and Eastern European Countries

A Theory of the Global Financial Cycle

"The Global Financial Cycle and Capital Flows During the COVID-19 Pandemic"

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