“Financial, Real, and Commodity Cycles”: Understanding Cycles to Assess Globalization

David Lipton, First Deputy Managing Director of the IMF, introduced Session One of the Eighteenth Jacques Polak Annual Research Conference. The session, Financial, Real, and Commodity Cycles, initiated discussions of the conference’s theme, The Global Financial Cycle.In regard to boom-bust cycles, Lipton posed the question: Is openness worth the risk? He said that in order to maximize gains and minimize risks from globalization, we must first understand the characteristics of financial cycles and the drivers. Two papers,  “Capital Flow Cycles: A Long, Global View” and “Global Macro-Financial Cycles and Spillovers” facilitated this discussion.

Carmen Reinhart (Harvard University) introduces the session’s first paper, “Capital Flow Cycles, A Long Global View.”

Carmen Reinhart presented the first paper, which offers a historical database of international capital flows since 1815. The paper “document[s] the interaction between the capital flow cycle, the commodity price super-cycle, and short-term interest rates” and demonstrates that cross-border financial flows are cyclical. Christopher Otrok presented the second paper and described its attempt to understand comovement of macroeconomic and financial sectors, spillovers, and common shocks. It studies G7 countries from 1985-2016. This paper finds that spillovers from the financial sector are stronger after onset of global financial crisis and that macroeconomic spillovers to financial cycle generally small, except onto interest rates. The discussant of the first paper, Jeromin Zettelmeyer, suggested that focusing on global cycles in recent years is not always useful. He said that “the global cycle view may be too aggregate” and that “the global cycle may be misidentified.” Mark Watson, the discussant of the second paper, says that the study’s “dynamics are constrained.”

Linkages across countries and markets in the recent financial crisis motivated both papers to some degree. Weighing the broad pros and cons of globalization is complicated, but approaching cycles first is helpful. The first paper’s historical perspective helps place the most recent international financial crisis into context, and the second paper allows for a better understanding of connections between sectors. For our purposes, these papers might enable a better understanding of the benefits of globalization for developing countries.

    Works Cited:

  • Eighteenth Jacques Polak Annual Research Conference: The Global Financial Cycle. IMF.
  • Ha, Jongrim. Kose, M. Ayhan. Otrok, Christopher. Prasad, Eswar S. Global Macro-Financial Cycles and Spillovers.
  • Reinhart, Carmen M. Reinhart, Vincent R. Trebesch, Cristoph. Capital Flow Cycles: A Long, Global View.
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8 Responses to “Financial, Real, and Commodity Cycles”: Understanding Cycles to Assess Globalization

  1. khanm18 says:

    When I think of commodity cycles, the first thing that always pops in my head was the commodity cycle that led to the economic decline of both Venezuela and Brazil, two countries that were too reliant on oil exports as their main sources of economic growth. In general, it will be very interesting to see how countries such as these react after such hard-hit downfalls.

    • inglism18 says:

      How does this heavy dependence on oil play into the economies you mention in the even longer run? Surely the cyclicality of commodities implies the economies will return to their glory days once the commodity hits an upswing. However, I do not see this as the case. Cyclicality gets thrown out the window when the commodity is being replaced. When the world no longer has such a dependence on that commodity, the economies will not be able to recover. But maybe this is not possible. Are the forces at large too great for oil to ever truly go away? Only time will tell.

  2. mac says:

    Business cycles are arguably one of the only things we know for sure in equity markets. Things will go up, and things will go down. How that can be used assess markets is most critical from a timing perspective. But even tools such as macro forecasting indicate that predictions are hard if not almost impossible.

  3. the prof says:

    OK, what of their findings? Can you provide one additional sentence on each?

  4. wheelers19 says:

    Since cycles of the economy are well known, what can be done to stabilize them? Will globalization help stabilize the global markets by increasing total quantities? With the growth of service industries in developed countries and the export of raw materials from developing countries, the connections between all countries of the world are strengthening.

  5. willinghamt19 says:

    Very interesting post. As we’ve discussed in class, the effects of globalization are complex and can often be either positive or negative for a given nation.

    It may be that global cycles are, largely, useless when attempting to better understand developing nations? Instead, could it be more important to analyze the relationship between business cycles in a few nations, ones which are connected to the developing nation of interest, and said developing nation?

  6. bryantc18 says:

    Interesting post. Globalization certainly exacerbated the financial crisis of 2007-2008. Selling Mortgage-backed securities and CDOs on a global markets, such as to Chinese investors, made it easy for banks to shift risk and burden other financial markets with toxic investments. The free flow of financial capital means that exposure to bad assets is not simply domestic, but rather global. When one pool of assets fails, the effect can spiral, leading to global shocks.

  7. nutiw18 says:

    Globalization presents a complicated issue. On one hand, it seems that richer nations often benefit from things such as cheaper labor, while others are exploited. As mentioned above, it also exacerbates financial crises’.

    But, at the same time trade and comparative advantage allow nations to compete on an international scale, so really what can be done?

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