Can Countries Manage Their Financial Conditions Amid Globalization?

By Nicolas Arregui, Selim A Elekdag, Gaston Gelos, Romain Lafarguette, Dulani Seneviratne

January 24, 2018

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Format: Chicago

Nicolas Arregui, Selim A Elekdag, Gaston Gelos, Romain Lafarguette, and Dulani Seneviratne. Can Countries Manage Their Financial Conditions Amid Globalization?, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the evolving importance of common global components underlying domestic financial conditions. It develops financial conditions indices (FCIs) that make it possible to compare a large set of advanced and emerging market economies. It finds that a common component, “global financial conditions,” accounts for about 20 percent to 40 percent of the variation in countries’ domestic FCIs, with notable heterogeneity across countries. Its importance, however, does not seem to have increased markedly over the past two decades. Global financial conditions loom large, but evidence suggests that, on average, countries still appear to hold considerable sway over their own financial conditions—specifically, through monetary policy. Nevertheless, the rapid speed at which foreign shocks affect domestic financial conditions may also make it difficult to react in a timely and effective manner, if deemed necessary.

Subject: Econometric analysis, Emerging and frontier financial markets, Exchange rate flexibility, Financial conditions index, Financial markets, Financial sector development, Financial sector policy and analysis, Foreign exchange, Vector autoregression

Keywords: Commodity price inflation, Domestic financial conditions, Emerging and frontier financial markets, Exchange rate flexibility, Financial condition shock, Financial conditions, Financial conditions index, Financial sector development, Foreign direct investment, Global, Global financial conditions, Interest rate, International policy transmission, Monetary policy, Monetary policy shock, Open economy, Tighter-than-average financial conditions, U.S. FCI, Vector autoregression, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/015
Stock No:

WPIEA2018015
ISBN:

9781484338612
ISSN:

1018-5941

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