The Global Financial Cycle and Capital Flow Dynamics
Explore the novel measures of the global financial cycle (GFC) and its correlation with capital flow episodes. Discover the robustness of different GFC measures and their impact on sudden stops and currency crises. Dive deep into the implications of VIX and other variables on the GFC.
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Presentation Transcript
The Global Financial Cycle and Capital Flow Episodes: a Wobbly Link? Scheubel, Stracca and Tille Financial Globalization and de-Globalization Conference Discussed by Valeriya Dinger
This paper Presents a novel measure of the global financial cycle (GFC) Explores the robustness of various GFC measures by tracing the correlations between them (incl. the newly constructed one) Examines the relation between the novel GFC measure and specific capital flow episodes
My take-away The novelty in my view: different papers have used different measures for GFC, results sometimes differ. It makes sense to use factor analysis to comprise the information of many potential GFC measure candidates. This is what the authors do and it is a very valuable exercise.
My more specific take-aways It is still work in progress but already a very informative reading: Measures of GFC are quite robust (strongly correlated). VIX is an important driver of GFC prior to 2009, less so after that. GFC strongly correlates with the probability of sudden stops, mixed results for currency crises.
Commentscont The new GFC measure: - What is the intuition of having a price and a quantitative measure of GFC? Can we have orthogonal measures (e.g. price when holding quantity constant? - how robust is the measure to starting with a specification with less variables and expanding the set later? Excluding VIX is a good start, what about excluding the broad dollar index? What about adding variables that have not been used so far?
Commentscont. Conceptually the choice of the variables can be rooted in an explicit discussion of what do the authors want to measure when they measure GFC. A definition? GFC is a synthetic term: Different measures of GFC stand for different policy questions when we ask how GFC affects X, Y, or Z? As in this case: how GFC affects capital flow episodes?
Commentscont. Capital flow episodes: - What do we (not) learn by focusing on capital flow episodes rather than on a continuous measure of capital flows?
Commentscont. The logit model (regressing the probability of a capital flow event) on GFC measures Are the models identified? Simultaneity and reverse causality Also some circularity with regard to capital flows to EME What are the channels linking the GFC and capital flows? How does the novel measure allows us to better identify these channels?
and some minor remarks The introduction could be sharpened The literature review could benefit from highlighting the links between the various strands of the research We need more descriptive statistics
Conclusion Valuable contribution and impressive potential for understanding the interactions between GFC and capital flows
