Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence

Helene Rey

No 10591, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: International finance; Monetary policy; Trilemma (search for similar items in EconPapers)
JEL-codes: E5 F3 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (840)

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