Author(s):
J. Scott Davis and Andrei Zlate
Date:
April 2022
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 48 advanced and emerging market economies. We begin by estimating the global financial cycle at a weekly frequency with data through 2021and observe the two standard deviation fall in our global financial cycle index over a period of four weeks in March 2020. We then estimate the country-specific sensitivities of exchange rates and capital flows to fluctuations in the global financial cycle. We show
how during the pandemic crisis, high-frequency COVID-19 fundamentals like infection and vaccination rates—which differed in timing and intensity across our sample countries— were just as important as traditional, slow-moving macroeconomic fundamentals, such as the net external asset position and the current account balance, in explaining the cross-country heterogeneity in exchange rates and capital flows