The global financial cycle and capital flows during the COVID-19 pandemic

J Scott Davis; Andrei Zlate

doi:10.1016/j.euroecorev.2023.104477

The global financial cycle and capital flows during the COVID-19 pandemic

Eur Econ Rev. 2023 Jul:156:104477. doi: 10.1016/j.euroecorev.2023.104477. Epub 2023 May 23.

Authors

J Scott Davis¹, Andrei Zlate²

Affiliations

¹ Federal Reserve Bank of Dallas, United States of America.
² Board of Governors of the Federal Reserve System, United States of America.

Abstract

We estimate the heterogeneous effect of the global financial cycle on exchange rates and cross-border capital flows during the COVID-19 pandemic, using weekly exchange rate and portfolio flow data for a panel of 59 advanced and emerging market economies. We estimate a global financial cycle (GFC) index at the weekly frequency with data through the end of 2021. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the GFC. The ability of the GFC to explain fluctuations in exchange rates and capital flows increased dramatically during the pandemic. There is significant cross-country heterogeneity in the response of exchange rates or capital flows to fluctuations in the GFC. During the pandemic, high-frequency indicators like weekly changes in Covid cases and vaccination rates were just as important as standard macroeconomic fundamentals like the current account, reserves, and net foreign assets in explaining this heterogeneity.

Keywords: COVID-19; Capital flows; Exchange rates; Global financial cycle.