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The Global Financial Cycle, Monetary Policies and Macroprudential Regulations in Small, Open Economies

Gregory Bauer (), Gurnain Pasricha (), Rodrigo Sekkel and Yaz Terajima

Staff Working Papers from Bank of Canada

Abstract: This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders. The resulting global financial cycle may be followed by a financial crisis that is quite costly. The cycle causes time variation in global risk premia in fixed income, equity and foreign exchange markets. In turn, time-varying global risk premia affect the transmission mechanisms of both conventional and unconventional monetary policies in small, open economies. While there are large costs associated with financial crises, the paper summarizes new work showing that the central banks’ leaning against the effects of the global financial cycle would typically be too costly. The paper concludes with some suggestions for the formation of macroprudential policies that are designed to offset the financial imbalances that grow during the boom phase of the cycle.

Keywords: International financial markets; Financial stability; Housing; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E42 E43 E44 E52 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon and nep-opm
Date: 2016
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Handle: RePEc:bca:bocawp:16-38