Global Financial Cycle and Liquidity Management
We use a tractable model to show that emerging markets can protect themselves from the global financial cycle by expanding (rather than restricting) capital flows. This involves accumulating reserves when global liquidity is high to buy back domestic assets at a discount when global financial conditions tighten. Since the private sector does not internalize how this buffering mechanism reduces international borrowing costs, a social planner increases the size of capital flows beyond the laissez-faire equilibrium. The model also provides a role for foreign exchange intervention in less financially developed countries. The main predictions of the model are consistent with the data.
Published Versions
Olivier Jeanne, 2023. "Global financial cycle and liquidity management," Journal of International Economics, . citation courtesy of
Global Financial Cycle and Liquidity Management, Olivier Jeanne, Damiano Sandri. in NBER International Seminar on Macroeconomics 2022, Forbes, Gourinchas, and Reis. 2023