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Global financial cycle and liquidity management

Olivier Jeanne and Damiano Sandri

Journal of International Economics, 2023, vol. 146, issue C

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 foreign liquid assets when global liquidity is high to then 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 relative to the laissez-faire equilibrium. The model also shows that foreign exchange interventions may be preferable to capital controls in less financially developed countries.

Keywords: Capital flows; Foreign exchange reserves; Capital flow management; Capital controls; Sudden stops (search for similar items in EconPapers)
JEL-codes: F31 F32 F36 F38 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Global financial cycle and liquidity management (2023) Downloads
Chapter: Global Financial Cycle and Liquidity Management (2022)
Working Paper: Global Financial Cycle and Liquidity Management (2020) Downloads
Working Paper: Global Financial Cycle and Liquidity Management (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:146:y:2023:i:c:s0022199623000223

DOI: 10.1016/j.jinteco.2023.103736

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