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World Asset Markets and the Global Financial Cycle*

Miranda-Agrippino, S., Rey, H
  Latest Draft: 25 Oct 2015,   First Draft: 06 Feb 2012,

Abstract:
We find that one global factor explains an important part of the variance of a large cross section of returns of risky assets around the world. This global factor can be interpreted as reflecting the time-varying degree of market wide risk aversion and aggregate volatility. Importantly, we show, using a large Bayesian VAR, that US monetary policy is a driver of this global factor in risky asset prices, the term spread and measures of the risk premium. US monetary policy is also a driver of US and European banks leverage, credit growth in the US and abroad and cross-border credit flows. Our large Bayesian VAR allows us to avoid the problem of omitted variables bias and, for the first time, to study in detail the workings of the "global financial cycle", i.e. the interactions between US monetary policy, global financial variables and real activity.



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*This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows"



Also NBER Working Paper 21722, CEPR Discussion Paper 10936.

Replication materials: Global Factor,  BVAR data

 

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