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 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.