Global financial cycle and liquidity management

Damiano Sandri and Olivier Jeanne

No 1069, BIS Working Papers from Bank for International Settlements

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; 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: 2023-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Global financial cycle and liquidity management (2023)
Chapter: Global Financial Cycle and Liquidity Management (2022)
Working Paper: Global Financial Cycle and Liquidity Management (2020)
Working Paper: Global Financial Cycle and Liquidity Management (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1069

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