The global financial cycle and capital flows during the COVID-19 pandemic

Abstract

We estimate the heterogeneous effect of the global financial cycle on exchange rates and cross-border capital flows during the COVID-19 pandemic, using weekly exchange rate and portfolio flow data for a panel of 59 advanced and emerging market economies. We estimate a global financial cycle (GFC) index at the weekly frequency with data through the end of 2021. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the GFC. The ability of the GFC to explain fluctuations in exchange rates and capital flows increased dramatically during the pandemic. There is significant cross-country heterogeneity in the response of exchange rates or capital flows to fluctuations in the GFC. During the pandemic, high-frequency indicators like weekly changes in Covid cases and vaccination rates were just as important as standard macroeconomic fundamentals like the current account, reserves, and net foreign assets in explaining this heterogeneity.