Template-Type: ReDIF-Paper 1.0
Author-Name: Damiano Sandri
Author-X-Name-First: Damiano
Author-X-Name-Last: Sandri
Author-Name: Olivier Jeanne
Author-X-Name-First: Olivier
Author-X-Name-Last: Jeanne
Title: Global financial cycle and liquidity management
Abstract: 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 foreign liquid assets when global liquidity is high to then 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 relative to the laissez-faire equilibrium. The model also shows that foreign exchange interventions may be preferable to capital controls in less financially developed countries.
Creation-Date: 2023-01
File-URL: https://www.bis.org/publ/work1069.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1069.htm
File-Format: text/html
Number: 1069
Keywords: capital flows, foreign exchange reserves, sudden stop, capital flow management, capital controls
Classification-JEL: F31, F32, F36, F38
Handle: RePEc:bis:biswps:1069