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The global capital flows cycle: structural drivers and transmission channels

Maurizio Michael Habib and Fabrizio Venditti

No 2280, Working Paper Series from European Central Bank

Abstract: In this paper, we study the effects of structural shocks that influence global risk – the main factor behind a “global capital flows cycle” – and how risk, in turn, is transmitted to capital flows. Our results show that not all the risk shocks driving the global financial cycle have the same effects on capital flows. Changes in global risk caused by pure financial shocks have the largest impact on the global configuration of capital flows, followed by US monetary policy shocks. As regards the transmission of risk to capital flows, we uncover a traditional “trilemma”, as countries more financially open and adopting a strict peg are more sensitive to global risk. This “trilemma” is mainly driven by one category of cross-border flows, “other investment”, confirming the importance of cross-border banking loans in the narrative of the global financial cycle. JEL Classification: E42, E52, F31, F36, F41

Keywords: capital flows; global financial cycle; global risk; international spillover; monetary policy (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
Note: 334027
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