Research notes · Finance

Do capital flows around the world move to their own rhythm, or to one set in Washington?

What the authors found

Miranda-Agrippino and Rey document the Global Financial Cycle: risky asset prices, intermediary leverage, credit growth and gross capital flows across the world comove strongly, with a single global factor explaining much of the common variation. US monetary policy is a driver — a contraction is followed by deleveraging among global intermediaries, rising risk aversion and a contraction in flows, whatever the recipient country's own circumstances.

What our data adds

The implication for small open economies is visible in the FDI table here. Suriname records net inflows of 45.1 per cent of GDP, Cyprus 27.1, Timor-Leste 13.3, Antigua and Barbuda 12.1. For an economy of that size, a swing in global risk appetite is not a marginal adjustment to the investment climate — it is a double-digit share of national income arriving or not arriving, decided by conditions the country has no influence over. That asymmetry is what the global cycle literature is about.

What this cannot show

The paper's evidence is a factor model over high-frequency asset prices and gross flows, neither of which this database holds. Annual net FDI as a share of GDP is the wrong frequency and the wrong concept — gross flows, which the cycle literature emphasises precisely because net figures conceal offsetting movements, are absent here. This is an illustration of why the question matters for small economies, not a measurement of the cycle.

The data behind it

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