The Global Financial Cycle and Capital Flows During the COVID-19 Pandemic

RePEc Short ID: pda415
ORCID iD: 0000-0002-8522-8826

Davis, J. Scott; Zlate, Andrei

doi:10.24149/gwp416

Working Paper

The Global Financial Cycle and Capital Flows During the COVID-19 Pandemic

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 48 advanced and emerging market economies. We begin by estimating the global financial cycle at a weekly frequency with data through 2021 and observe the two standard deviation fall in our global financial cycle index over a period of four weeks in March 2020. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the global financial cycle. We show how during the pandemic crisis, high-frequency COVID-19 fundamentals like infection and vaccination rates—which differed in timing and intensity across our sample countries—were just as important as traditional, slow-moving macroeconomic fundamentals, such as the net external asset position and the current account balance, in explaining the cross-country heterogeneity in exchange rates and capital flows.

Keywords: COVID-19; global financial cycle; capital flows; exchange rates;

JEL Classification: F3; F4;

https://doi.org/10.24149/gwp416