Working Paper: CEPR ID: DP10936
Authors: Silvia Miranda-Agrippino; Hélène Rey
Abstract: We find that one global factor explains an important part of the variance of a large cross section of returns of risky assets around the world. Using a model with heterogeneous investors, we interpret the global factor as reflecting aggregate realised variance and the time-varying degree of market-wide risk aversion. A medium-scale Bayesian VAR allows us to analyse the workings of the "Global Financial Cycle", i.e. the interaction between US monetary policy, real activity and global financial variables such as credit spreads, cross-border credit flows, bank leverage and the global factor in asset prices. We find evidence of large monetary policy spillovers from the US to the rest of the world.
Keywords: Bayesian VAR; Dynamic Factor Model; International Financial Flows; Monetary Policy
JEL Codes: E44; E58; F30; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy (E52) | global credit conditions (F65) |
| US monetary policy (E52) | asset prices (G19) |
| US monetary policy (E52) | leverage of US and European investors (G15) |
| leverage of US and European investors (G15) | global credit flows (F65) |
| contractionary monetary policy shocks (E39) | global banks' leverage (F65) |
| global banks' leverage (F65) | credit availability (G21) |
| credit availability (G21) | asset prices (G19) |