American financial hegemony, global capital cycles, and the macroeconomic growth environment

Global financial cycles have become a growing concern for scholars and policymakers. Recent research has identified these cycles as originating in American markets, at least in part due to policy innovations in the United States. We articulate a previously unidentified, but powerful, mechanism that influence growth (and growth volatility) in the global economy: expansions in the American financial cycle disproportionately affect global credit conditions, leading to a higher incidence of gross capital inflow surges that subsequently create a boom-bust growth dynamic in recipient economies. We evaluate this argument with an extensive empirical examination of 102 countries from 1975 to 2011 and find substantial support for the argument: US financial market developments produce capital flow cycles that challenge the ability of policymakers to stabilize their macroeconomies. We disaggregate capital flows and find that interbank lending plays a crucial role in driving these outcomes, with the results exhibiting a high degree of robustness to alternative specifications. Domestic policy tools alone may be insufficiently powerful to counteract volatility induced by these capital waves emanating from the core of the global financial system.