Professor of Economics - London Business School
Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence
Date Published: 2013
Rey, Hélène, "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence", Federal Reserve Bank of Kansas City Economic Policy Symposium (2013).
There is a global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symptoms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country, which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime.
Rey, Hélène, 2013, "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence.", Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve of Kansas City Economic Symposium, p 285-333.
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Paper presented at the 25th Jackson Hole symposium, Wyoming, August 2013: "Global Dimensions of Unconventional Monetary Policy".