A Theory of the Global Financial Cycle / J. Scott Davis, Eric van Wincoop.

Format:

Book

Author/Creator:

Davis, J. Scott.

Contributor:

National Bureau of Economic Research.

van Wincoop, Eric.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29217.

NBER working paper series no. w29217

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

We develop a theory to account for changes in prices of risky and safe assets and gross and net capital flows over the global financial cycle (GFC). The multi-country model features global risk-aversion shocks and heterogeneity of investors both within and across countries. Within-country heterogeneity is needed to account for the drop in gross capital flows during a negative GFC shock (higher global risk-aversion). Cross-country heterogeneity is needed to account for the differential vulnerability of countries to a negative GFC shock. The key vulnerability is associated with leverage. In both the data and the theory, leveraged countries (net borrowers of safe assets) deleverage through negative net outflows of risky assets and positive net outflows of safe assets, experience a rise in the current account and a greater than average drop in risky asset prices. The opposite is the case for non-leveraged countries (net lenders of safe assets).

Notes:

Print version record

September 2021.