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Report
Global Liquidity: Drivers, Volatility and Toolkits
Global liquidity refers to the volumes of financial flows—largely intermediated through global banks and non-bank financial institutions—that can move at relatively high frequencies across borders. The amplitude of responses to global conditions like risk sentiment, discussed in the context of the global financial cycle, depends on the characteristics and vulnerabilities of the institutions providing funding flows. Evidence from across empirical approaches and using granular data provides policy-relevant lessons. International spillovers of monetary policy and risk sentiment through ...
Journal Article
The global saving glut and the fall in U.S. real interest rates: A 15-year retrospective
The authors revisit Ben Bernanke’s global saving glut (GSG) hypothesis from 2005—which links low long-term real interest rates in the United States to excess saving in a number of non-Western countries, including, but not limited to, China. Using an analytical framework and empirical data, they find that the ability of the GSG hypothesis to explain the fall in long-term real rates between 2002 and 2006 is likely much greater than its ability to account for the further fall in these rates from the Great Recession onward.
Report
Liquidity traps, capital flows
Motivated by debates surrounding international capital flows during the Great Recession, we conduct a positive and normative analysis of capital flows when a region of the global economy experiences a liquidity trap. Capital flows reduce inefficient output fluctuations in this region by inducing exchange rate movements that reallocate expenditure toward the goods it produces. Restricting capital mobility hampers such an adjustment. From a global perspective, constrained efficiency entails subsidizing capital flows to address an aggregate demand externality associated with exchange rate ...
Working Paper
Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America
Since 1950, the economies of East Asia grew rapidly but received little international capital, while Latin America received considerable international capital even as their economies stagnated. The literature typically explains the failure of capital to flow to high growth regions as resulting from international capital market imperfections. This paper proposes a broader thesis that country-specific distortions, such as domestic labor and capital market distortions, also impact capital flows. We develop a DSGE model of Asia, Latin America, and the Rest of the World that features an ...
Report
International capital flow pressures
This paper presents a new measure of capital flow pressures in the form of a recast exchange market pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes a global risk response index, which reflects the country-specific sensitivity of capital flow pressures to measures of ...
Working Paper
The Global Financial Cycle and Capital Flows During the COVID-19 Pandemic
We estimate the heterogeneous effect of the global financial cycle on exchange rates and cross-border capital flows during the COVID-19 pandemic, using weekly exchange rate and portfolio flow data for a panel of 48 advanced and emerging market economies. We begin by estimating the global financial cycle at a weekly frequency with data through 2021 and observe the two standard deviation fall in our global financial cycle index over a period of four weeks in March 2020. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the global ...
Report
The shifting drivers of global liquidity
The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flows to U.S. monetary policy rose substantially in the immediate aftermath of the global financial crisis, peaked around the time of the 2013 Federal Reserve ?taper tantrum,? and then partially reverted toward pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably after the crisis and became similar ...
Report
International Capital Flow Pressures and Global Factors
The risk sensitivity of international capital flow pressures is explored using a new Exchange Market Pressure index that combines pressures observed in exchange rate adjustments with model-based estimates of incipient pressures that are masked by foreign exchange interventions and policy rate adjustments. The sensitivity of capital flow pressures to risk sentiment, including for so-called safe-haven currencies, evolves over time, varies significantly across countries, and differs between normal times and extreme stress events. Across countries, risk sensitivities and safe-haven status are ...
Working Paper
The Impact of Bretton Woods International Capital Controls on the Global Economy and the Value of Geopolitical Stability: A General Equilibrium Analysis
This paper quantifies the positive and normative effects of Bretton Woods capital controls on global economic activity. It applies a three-region DSGE model of the U.S., Western Europe, and the Rest of the World (ROW) that measures capital controls using observed regional consumption growth differences. We find sizable controls during Bretton Woods that prevented ROW capital from flowing to the U.S., and which reduced U.S. welfare and raised ROW welfare. By preventing capital flight in developing economies, we find that Bretton Woods controls promoted the U.S. foreign policy objective of ...
Working Paper
The Impact of Bretton Woods International Capital Controls on the Global Economy and the Value of Geopolitical Stability: A General Equilibrium Analysis
This paper quantifies the positive and normative impacts of Bretton Woods capital controls on global economic activity. It applies a three-region DSGE model consisting of the U.S., Western Europe, and the Rest of the World (ROW) to measure de facto capital controls and analyze their effects. Counterfactual analyses show Bretton Woods controls significantly prevented ROW capital from flowing to the U.S., had large negative welfare effects on the U.S., raised welfare in the ROW, and increased global output. Why did the U.S. support controls, given lower welfare? By keeping capital in the ROW, ...