Global Financial Cycle and Liquidity Management

Olivier Jeanne and Damiano Sandri

No 15328, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use a tractable model to show that emerging markets can protect themselves from the global financial cycle by expanding (rather than restricting) capital flows. This involves accumulating reserves when global liquidity is high to buy back domestic assets at a discount when global financial conditions tighten. Since the private sector does not internalize how this buffering mechanism reduces international borrowing costs, a social planner increases the size of capital flows beyond the laissez-faire equilibrium. The model also provides a role for foreign exchange intervention in less financially developed countries. The main predictions of the model are consistent with the data.

Keywords: Capital flows; Foreign exchange reserves; Sudden stop; Capital flow management; Capital controls (search for similar items in EconPapers)
JEL-codes: F31 F32 F36 F38 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-cwa, nep-fdg, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Global financial cycle and liquidity management (2023)
Working Paper: Global financial cycle and liquidity management (2023)
Chapter: Global Financial Cycle and Liquidity Management (2022)
Working Paper: Global Financial Cycle and Liquidity Management (2020)
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