Can Countries Manage Their Financial Conditions Amid Globalization?

The fundamentals of safe assets

“…The correlation is so strong that a "global measure", computed as the market-value-weighted average of the equity option-implied volatility in the United States, the United Kingdom, Germany, Japan, France, the Netherlands, and Switzerland, has a correlation of 0.98 with the VIX. 2 A robustness exercise, where we replace the VIX with the global index of financial conditions in use at the IMF (Arregui et al, 2018), leaves the main results of our analysis unaffected. with distinct implications for asset prices.…”

Capital Flows-at-Risk: Push, Pull and the Role of Policy

“…We construct country-level Financial Condition Indices (FCIs) in the spirit of Arregui et al (2018) and Eguren-Martin and Sokol (2019), using data for 43 advanced and emerging market economies between April 1995 and December 2018. The financial series included are as follows: term, sovereign, interbank and corporate spreads, long-term interest rates, equity returns and volatility and relative market capitalisation of the financial sector.…”

“…Characterising distributions is particularly useful in the context of capital flows because it goes beyond the mean, which has been the object of study of a large part of the literature, 10 Note that the resulting first principal component of the series considered is very similar to the common factor obtained when following Arregui et al (2018) and relying on the method of Koop and Korobilis (2014) which allows for time variation in the parameters and attempt to 'clean' financial conditions from changes that reflect a response to macroeconomic news (proxied by industrial production and CPI inflation). This can be interpreted the result of relative stability in the parameters and the fact that asset prices tend to react to news about expected rather than realised macroeconomic aggregates.…”

The Expansionary Lower Bound

“…The large swings in capital flows during the global financial crisis and the concerns about international spillovers from the ongoing US monetary tightening have rekindled the debate on whether emerging markets EMs However, growing skepticism against this benevolent view of capital flows has been voiced by both academics and policy makers (Blanchard et al, 2016;IMF, 2012;Obstfeld, 2015;Rajan, 2015;Rey, 2015Rey, , 2016Arregui et al, 2018). These concerns stem in part from the observation that financial and monetary conditions in EMs are strongly affected by volatile international capital flows, raising doubts on whether monetary policy in EMs can effectively balance these pressures.…”