America First? A US-centric View of Global Capital Flows

Abstract

Both academic researchers and policymakers posit a unique role for the US in the international financial system. This paper investigates the characteristics and determinants of US cross-border financial flows and examines how these contrast with those of the rest of the world. We analyse the relative importance of US, country-specific, and global variables as determinants of aggregate and bilateral US financial flows and as determinants of country-level cross-border financial flows excluding those directly involving the US. Our results indicate that variation in US variables -notably the VIX and US dollar exchange rate -has a quantitatively important influence on global financial flows, but mostly via US cross-border flows. Global and national risk indicators perform better in explaining "rest of the world" flows. Moreover, we find that the correlation between US and rest of the world flows peaks in periods of elevated uncertainty. We interpret our findings as evidence for the existence of a global financial cycle, only some of which is driven by policies and events in the US.

Capital inflows to emerging countries and their sensitivity to the global financial cycle

“…OIs are however not significantly driven by the VIX while they are positively affected by the Treasury yields, which could be given by the positive impact of the increase in interest rate margins for banking activities. Consistently with other results in the literature (McQuade & Schmitz, 2019), the Federal Funds Rate, which proxies the effective short-term policy rate, is generally not significant once we include the VIX in the regressions. Among the pull factors, government net borrowing, a measure of country's riskiness and reliability, negatively correlates with portfolio inflows as an increase in risk aversion discourages investments in EMEs' risky assets.…”

“…This could help us interpret the coefficient obtained in the exercise with interactions, that is, the lower VIX coefficient masks a strong instability before the GFC and a persistent, negative and increasing impact after the GFC and, again, after the TT in the final part of our sample. The results for the VIX appear to be broadly in line with previous contributions that perform regressions for the US positions (McQuade & Schmitz, 2019). From panel (c) we conclude that the coefficient of the government borrowing on PFI debt is significant and increasingly negative starting from 2013Q3, confirming the idea that PFI debt becomes more sensitive to this measure of domestic vulnerability after the TT.…”

Leverage cycles, growth shocks, and sudden stops in capital inflows

“…The VIX is widely used in the literature to capture global uncertainty or risk aversion (e.g. Forbes and Warnock, 2012;Fratzscher, 2012;McQuade and Schmitz, 2019). Changes in global liquidity are captured by year-on-year growth in global money supply, i.e.…”

“…See, for example,Rey (2013Rey ( , 2016,Cerutti et al, (2019),McQuade and Schmitz (2019) for a discussion of global factors as determinants of international capital flows. 5Forbes and Warnock (2012b) show that these results also hold for episodes disaggregated into debt and equity led episodes showing that most episodes of extreme capital flow movements are debt-led.6 Theoretical contributions on the role of push factors includeBacchetta et al (2012),Gourio et al (2011),Bruno and Shin (2015) on risk,Giannetti (2007),Brunnermeier (2009) andCalvo (2009) on liquidity/credit, as well asDedola and Lombardo (2012) andDevereux and Yetman (2010) on leverage.…”

Duration of Global Financial Cycles

“…The LIBOR-OIS spread measures the credit risk for the global banking sector and in this respect, shows the stress in private interbank funding markets at the global level. Therefore, an increase in the LIBOR-OIS spread provides information about soaring stress in the banking sector at the global level [17,48,49]. Fluctuations in the LIBOR-OIS spread is parallel with the VIX index and the TED Spread.…”