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A service for global professionals · Tuesday, June 19, 2018 · 452,178,916 Articles · 3+ Million Readers

Can Countries Manage Their Financial Conditions Amid Globalization?

Author/Editor:

Nicolas Arregui ; Selim Elekdag ; R. G Gelos ; Romain Lafarguette ; Dulani Seneviratne

Publication Date:

January 24, 2018

Electronic Access:

Free Full Text (PDF file size is 775 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper examines the evolving importance of common global components underlying domestic financial conditions. It develops financial conditions indices (FCIs) that make it possible to compare a large set of advanced and emerging market economies. It finds that a common component, “global financial conditions,” accounts for about 20 percent to 40 percent of the variation in countries’ domestic FCIs, with notable heterogeneity across countries. Its importance, however, does not seem to have increased markedly over the past two decades. Global financial conditions loom large, but evidence suggests that, on average, countries still appear to hold considerable sway over their own financial conditions—specifically, through monetary policy. Nevertheless, the rapid speed at which foreign shocks affect domestic financial conditions may also make it difficult to react in a timely and effective manner, if deemed necessary.

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