The Missing “Cycle” Part and Other Thoughts on the Global Financial Cycle

Abstract

The paper studies co-movement in capital flows, which gives rise to a phenomenon dubbed the global financial cycle. It first estimates a global common factor in capital flows using a factor model and draws inferences of its quantitative importance. Then the paper studies the cyclical properties of the extracted factor and concludes that, in general, its importance for capital flows is relatively limited. This may suggest that the Mundell-Fleming trilemma (as opposed to dilemma) still describes the trade-off faced by policymakers, and domestic policies play the primary role in maintaining macroeconomic stability.