The dynamics of global financial cycle and domestic economic cycles: Evidence from India and Indonesia

K.P. Prabheesh, Reza Anglingkusumo and Solikin Juhro

Economic Modelling, 2021, vol. 94, issue C, 831-842

Abstract: This paper analyses the role of the global financial cycle in determining domestic economic cycles, defined as business and credit cycle, of India and Indonesia, two key open lower-middle income emerging economies in Asia. The paper particularly examines to what extend the global financial cycle can explain the variation in domestic economic cycles in the two countries and analyses the differences. Using quarterly data from 2000 to 2018, and employing various econometric techniques such as concordance index, DCC-GARCH model and standard SVAR, the study finds: (i) the domestic credit cycle is highly synchronized with global financial cycle for India, whereas in the case of Indonesia the synchronization is muted and indirect, (ii) exchange rate appreciation leads to credit boom in India, indicating risk taking behaviour through the financial channel; while in Indonesia, credit boom is driven mainly by the indirect impact of global financial cycle through the domestic real economy, (iii) the Reserve Bank of India responds to output gap strongly, suggesting an adherence to inflation targeting framework, and (iv) Bank Indonesia also responds to exchange rate volatility and credit cycle as an approach to mitigate the risks associated with large and often volatile capital flows. These differences in monetary policy approach may explain the differences in transmission of spill-over effects of global financial cycle on domestic economic cycles in the two countries.

Keywords: Global financial cycles; Spill-over; Capital flows; Risk taking; Monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 F32 F44 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:94:y:2021:i:c:p:831-842

DOI: 10.1016/j.econmod.2020.02.024

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