U.S. Monetary Policy and the Global Financial Cycle

Silvia Miranda-Agrippino,Hélène Rey

doi:10.1093/restud/rdaa019

Silvia Miranda-Agrippino, Hélène Rey

Open Access

https://doi.org/10.1093/restud/rdaa019

Copy DOI

Abstract

Abstract U.S. monetary policy shocks induce comovements in the international financial variables that characterize the “Global Financial Cycle.” A single global factor that explains an important share of the variation of risky asset prices around the world decreases significantly after a U.S. monetary tightening. Monetary contractions in the US lead to significant deleveraging of global financial intermediaries, a decline in the provision of domestic credit globally, strong retrenchments of international credit flows, and tightening of foreign financial conditions. Countries with floating exchange rate regimes are subject to similar financial spillovers.

Highlights

Observers of balance of payment statistics and international investment positions all agree: the international financial landscape has undergone massive transformations since the 1990s
With a global Bayesian VAR, we study the international transmission of U.S monetary policy that is mediated through the reaction of asset prices, of global credit and capital inflows, and of the leverage of financial intermediaries; these are the variables that characterize the Global Financial Cycle
This paper establishes the importance of U.S monetary policy as one of the drivers of the Global Financial Cycle

Summary

Introduction

Observers of balance of payment statistics and international investment positions all agree: the international financial landscape has undergone massive transformations since the 1990s. Financial globalization is upon us in a historically unprecedented way, and we have probably surpassed the pre-WWI era of financial integration celebrated by Keynes in “The Economic Consequences of the Peace.”. The role of the U.S as the hegemon of the international monetary system has largely remained unchanged, and has long outlived the end of Bretton Woods, as emphasized in e.g. The rising importance of cross-border financial flows and holdings has been documented in the literature.. What has not been explored as much, are the consequences of financial globalization for the workings of national financial markets, and for the transmission of U.S monetary policy beyond the domestic border.

Results

Discussion

Conclusion