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This provides support to the new theory of the global financial cycle that stresses the limited ability of a floating rate to shield domestic financial conditions from the global ones. It is possible to qualify this result, analysing a finer partition of the sample. Summing up, global risk aversion emerges as a significant driver of capital flows and stock returns and its impact is amplified by capital account openness, but not necessarily by the exchange rate regime, which matters only for asset prices when the capital account is open, not for capital flows.

Empirically, there is a broad consensus that monetary policy actions of large central banks, such as the Federal Reserve System, spill over to global financial markets.

Ronja Kempin

However, there does not seem to be a stable relationship between the US policy rate, the value of the US dollar and global capital flows. Chart 2b shows that the nominal effective exchange rate of the US dollar depreciated from to the onset of the global financial crisis in the autumn of During this period, capital flows were on an upward trend among advanced and emerging economies.

The crisis signals a turning point for both the US dollar, which appreciates sharply, and capital flows, which retrench dramatically. Overall, the evidence reviewed here suggests that capital flows and risky asset prices have been influenced by global risk factors in the past decades. This influence is particularly evident in the period preceding the global financial crisis and in its immediate aftermath. Notably, the most recent period has instead been characterised by a loosening of the cycle.

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Moreover, the exchange rate regime does not seem to matter for the transmission of the cycle, with the possible exception of risky asset prices when the capital account is open. While the central role of US monetary policy and the presence of a US dollar cycle connected to the global financial cycle is a concept well entrenched among economists, more work is needed to pin down the economic significance of these drivers of the financial cycle for the global economy.

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In different terms, while the existence of a causal nexus between US monetary policy and capital flows cannot be excluded, the quantitative relevance of changes in US interest rates for international capital flows appears limited and would have to be ascertained.

The euro area is not an island: product and financial market openness make the euro naturally exposed to changes in global financial conditions. In the previous sections, a connection between, on the one hand, global risk aversion and, on the other hand, capital flows and stock returns has been outlined.

The transmission of global shocks to the euro area economy is amplified by the presence of large, global euro area banks that play a central role in international lending.

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Due to its size and interconnectedness, however, the euro area is not only a receiver but also a generator of shocks that affect the global financial cycle. Given the prominence of the US economy in driving the financial cycle, it is interesting to focus on the relationship between US and euro area financial conditions. The first index, computed by Goldman Sachs, gives a relatively large weight to the level of interest rates paid by sovereigns and corporates and also takes into account the tightening effects of exchange rate appreciations.

Furthermore, it does not include exchange rates.


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Although both indices are defined as measures of financial conditions, for the sake of exposition we will refer to them in the rest of the discussion as indices of financial conditions and financial tensions, respectively. The degree of synchronisation of financial conditions between the United States and the euro area is overall tenuous and changes over time, also reflecting differences in the monetary policy stance.

Chart 3a shows the index of financial conditions for the United States and for the euro area between and The second follows the bankruptcy of Lehman Brothers. The third, from the middle of to the beginning of , is largely driven by an appreciation of the dollar. The timeline for the euro area is characterised by two important differences.

First, the impact of the US recession is very muted. These differences show up in notably different correlations across time periods. Before the financial crisis, the correlation in financial conditions is mildly positive 0. Chart 3b shows the two indices of financial tensions for the United States and for the euro area. It is evident that financial tensions are, most of the time, dormant. Overall, the correlation between the two indices is strong and stable ranging between 0.

Overall, two key messages emerge from this analysis. First, financial conditions in the euro area evolve largely independently from global forces, also thanks to the ability of monetary policy to steer expected rates on safe assets and term premia in the desired direction. Second, credit spreads and realised volatilities in the United States and in the euro area are highly synchronised, reflecting the global nature of risk appetite in closely financially integrated markets. Financial conditions and financial tensions in the United States and in the euro area.

Sources: Goldman Sachs and Bloomberg Analytics. The financial condition indices refer to the Goldman Sachs panel a and Bloomberg panel b constructed financial condition indices for the United States and the euro area. Positive deviations from zero signify a tightening, while negative deviations from zero signify a loosening.

This box documents how the Global Stock Market Factor is computed and explores its relative importance for euro area stock returns. The first common factor is the Global Stock Market Factor. Two results stand out.


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First, commonality is very heterogeneous across countries. Second, the relevance that the global factor has for the equity returns of euro area countries dark blue bars and the United States yellow bar is overall comparable, indicating that global shocks are an important factor in shaping both euro area and US equity price movements. Real economy and financial market integration over the past decades has influenced the synchronisation of capital flows and asset prices across the world. However, after the crisis, the synchronisation of capital flows and stock prices has abated, returning to the levels observed between the s and the s.

The global financial cycle is closely connected to global risk factors. A measure of global risk aversion constructed as the common factor that drives a panel of equity returns has a significant impact on capital flows and stock returns. The exchange rate regime matters only for the transmission of global risk to asset prices when the capital account is open. The impact of US interest rates and the US dollar exchange rate on capital flows, instead, appears to be episodic. The influence of the global financial cycle on the euro area depends on the particular measure that is analysed.

The article finds that financial market tensions have typically been synchronised between the two areas. We are always working to improve this website for our users. To do this, we use the anonymous data provided by cookies. Learn more about how we use cookies. See what has changed in our privacy policy. The global financial cycle: implications for the global economy and the euro area 1 Introduction 2 Is there a global financial cycle?

Prepared by Fabrizio Venditti This box documents how the Global Stock Market Factor is computed and explores its relative importance for euro area stock returns. The evidence supporting the presence and economic significance of a global financial cycle has been challenged by a recent study by Cerutti, E.

In the euro area, risk sharing takes place mainly via the capital channel. As regards risky asset prices, the focus is on stock returns, since it is difficult to obtain other measures, such as corporate bond prices or mortgage rates, for a large panel of countries including emerging economies since the s. See also Forbes, K. The choice of the VIX can be justified on three grounds.

Second, the US stock market plays a central role in global financial markets owing to the importance of the US dollar. Third, the VIX is available for a long time span. The results are robust to the inclusion of different lags of the dependent variable.


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  7. The exchange rate regime classification is based on Ilzetzki, E. This outcome may be explained by the increased attractiveness of the US dollar as a safe haven since the start of the global financial crisis. It is possible to note that the value of the dollar is positively correlated with risk factors around 0. This paper will also discuss how this higher revenue should be spent in order to narrow income and wealth divide.

    As a case in point, education will be highlighted. This has contributed to the severity of the recent financial and economic crises. The recovery from the crisis has been rather sluggish so far, and this has given rise to a renewed discussion about stagnation tendencies in mature capitalist economies. Therefore, in the current paper we will focus on the development of income distribution since the outbreak of the crisis for a set of mature capitalist economies. The focus will be on functional distribution wage and profit shares , personal or household distribution Gini coefficient, top-income shares and on wage dispersion.

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    Labour productivity and wages decline if workers are obliged to spend time complying with complex and unwieldy security policies. Online social networks, easily accessible via mobile technologies, create opportunities for distractions and shirking at work.

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