How strong is the link between the global financial cycle and national macro-financial dynamics? A wavelet analysis

Abstract

This paper explores the interaction between the global financial cycle (GFCy) and country-specific macro-financial dynamics. We investigate two alternative measures of the GFCy, the CBOE VIX index and Rey (2013)’s global factor, and equity prices, house prices, and aggregate credit volume as national variables. By means of a continuous wavelet analysis and a structural VAR framework, we explore such interaction in the frequency- and time-domain for 12 countries. Our evidence reveals that a strong and uniform relationship between the global financial cycle and national macro-financial series exists only during periods of global financial stress. Beyond those periods, we find significant variation in the relationship – both across time and countries. The choice of the global financial cycle proxy plays a very limited role.