ABSTRACT
This chapter begins by examining if, because of international capital markets integration, a global financial cycle exists. The consequences of international financial flows on financial stability in emerging countries are analyzed. The chapter considers two issues: the definition of global financial cycles and the existence of global financial cycles. Global financial cycles are associated with surges and retrenchments in capital flows, booms and busts in asset prices and crises. If global financial cycles exist, a global risk shock could be transmitted to capital flows and risky asset prices, irrespective of the prevailing exchange rate regime. Evidence of financial fragmentation also appeared in the interbank market in 2011-2012 with increasing interest rate differentials across countries and vanishing cross-border funding. Reducing or removing frictions on cross-border capital flows tends, inter alia, to equalize the cost of capital across countries and can enhance the ability of domestic and foreign households to share risks..
