The Financial Center Leverage Cycle: Does it Spread Around the World?

Graciela Kaminsky, Leandro Medina (leandrom@gwu.edu) and Shiyi Wang
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Graciela Kaminsky: George Washington University and NBER

Working Papers from The George Washington University, Institute for International Economic Policy

Abstract: With a novel database, we examine the evolution of capital flows to the periphery since the collapse of the Bretton Woods System in the early 1970s. We decompose capital flows into global, regional, and idiosyncratic factors. In contrast to previous findings, which mostly use data from the 2000s, we find that booms and busts in capital flows are mainly explained by regional factors and not the global factor. We then ask, what drives these regional factors. Is it the leverage cycle in the financial center? What triggers the leverage cycle in the financial center? Is it a change in global investors’ risk appetite? Or, is it a change in the demand for capital in the periphery? We link leverage in the financial center to regional capital flows and the cost of borrowing in international capital markets to answer these questions. Our estimations indicate that regional capital flows are driven by supply shocks. Interestingly, we find that the leverage in the financial center has a time-varying behavior, with a movement away from lending to the emerging periphery in the 1970s to the 1990s towards lending to the advanced periphery in the 2000s.

Keywords: International Borrowing Cycles; Global and Regional Factors; Push and Pull Factors of Capital Flows; Financial Center Leverage Cycles (search for similar items in EconPapers)
JEL-codes: F30 F34 F65 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2020-02
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-opm
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http://www2.gwu.edu/~iiep/assets/docs/papers/2020WP/KaminskyIIEP2020-2.pdf (application/pdf)

Related works:
Journal Article: The Financial Center Leverage Cycle: Does It Spread around the World? (2020)
Working Paper: The Financial Center Leverage Cycle: Does it Spread Around the World? (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:gwi:wpaper:2020-2

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