The Effect of the Global Financial Cycle on National Financial Cycles: Evidence from BRICS Countries

This paper examines whether a flexible exchange rate regime, capital controls,
and foreign reserves are effective tools to reduce BRICS countries’ exposure to
global financial cycle (GFCy) shocks. Based on local projections in which we allow the response of national financial cycles (NFCys) to the GFCy to vary, we observe that flexible exchange rate regime absorbs GFCy shocks in BRICS countries,
as do tighter capital controls and larger international reserves. We also find that
the responses of NFCys to GFCy shocks are heterogeneous across countries, with
stronger effects observed in countries with higher inflation and GDP growth.