The Financial Center Leverage Cycle: Does it Spread Around the World?

14 Pages Posted: 9 Mar 2020 Last revised: 17 Sep 2021

See all articles by Graciela Kaminsky

Graciela Kaminsky

National Bureau of Economic Research (NBER); George Washington University - Department of Economics

Leandro Medina

George Washington University - Department of Economics; International Monetary Fund (IMF) - Western Hemisphere Department

Shiyi Wang

George Washington University - Department of Economics

Date Written: February 2020

Abstract

With a novel database, we examine the evolution of capital flows to the periphery since the collapse of the Bretton Woods System in the early 1970s. We decompose capital flows into global, regional, and idiosyncratic factors. In contrast to previous findings, which mostly use data from the 2000s, we find that booms and busts in capital flows are mainly explained by regional factors and not the global factor. We then ask, what drives these regional factors. Is it the leverage cycle in the financial center? What triggers the leverage cycle in the financial center? Is it a change in global investors’ risk appetite? Or, is it a change in the demand for capital in the periphery? We link leverage in the financial center to regional capital flows and the cost of borrowing in international capital markets to answer these questions. Our estimations indicate that regional capital flows are driven by supply shocks. Interestingly, we find that the leverage in the financial center has a time-varying behavior, with a movement away from lending to the emerging periphery in the 1970s to the 1990s towards lending to the advanced periphery in the 2000s.

Suggested Citation

Kaminsky, Graciela and Medina, Leandro and Wang, Shiyi, The Financial Center Leverage Cycle: Does it Spread Around the World? (February 2020). NBER Working Paper No. w26793, Available at SSRN: https://ssrn.com/abstract=3550961

Graciela Kaminsky (Contact Author)

National Bureau of Economic Research (NBER)

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George Washington University - Department of Economics ( email )

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HOME PAGE: http://www.gracielakaminsky.com/

Leandro Medina

George Washington University - Department of Economics ( email )

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International Monetary Fund (IMF) - Western Hemisphere Department

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Washington, DC 20431
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Shiyi Wang

George Washington University - Department of Economics ( email )

United States

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