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

43 Pages Posted: 19 May 2015

See all articles by Hélène Rey

Hélène Rey

London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

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

JEL Classification: E5, F3

Suggested Citation

Rey, Helene, Dilemma Not Trilemma: The Global Financial Cycle and Monetary Policy Independence (May 2015). CEPR Discussion Paper No. DP10591, Available at SSRN: https://ssrn.com/abstract=2608049

Helene Rey (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2
Abstract Views
1,494
PlumX Metrics