Monetary Policy Independence and the Strength of the Global Financial Cycle

Christian Friedrich, Pierre Guérin and Leiva-León, Danilo
Authors registered in the RePEc Author Service: Danilo Leiva-Leon ()

No 16203, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a new strength measure of the global financial cycle by estimating a regime-switching factor model on cross-border equity flows. We then assess how this measure affects monetary policy independence, defined as central banks' responses to exogenous changes in inflation. We show that central banks tighten their policy rates in response to an unanticipated increase in inflation during times when global financial cycle strength is low, but their responses are muted when financial cycle strength is high. Finally, we show that capital controls, macroprudential policies, and a flexible exchange rate regime can increase monetary policy independence.

Keywords: Global financial cycle strength; Monetary policy independence; Capital controls; Macroprudential policies (search for similar items in EconPapers)
JEL-codes: E4 E5 F32 F42 G15 G18 (search for similar items in EconPapers)
Date: 2021-05
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP16203 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Monetary Policy Independence and the Strength of the Global Financial Cycle (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:16203

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP16203

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().