Working Paper: CEPR ID: DP11027
Authors: Hélène Rey
Abstract: This lecture argues that the Global Financial Cycle is a challenge for the validity of the Mundellian trilemma. I present evidence that US monetary policy shocks are transmitted internationally and affect financial conditions even in inflation targeting economies with large financial markets. Hence flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows.
Keywords: global financial cycle; monetary policy; trilemma
JEL Codes: F33; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy shocks (E39) | mortgage spreads (G21) |
| US monetary policy shocks (E39) | corporate spreads (G39) |
| US monetary policy shocks (E39) | VIX (C58) |
| US monetary policy shocks (E39) | international financial conditions (F30) |
| 20 basis point tightening in US interest rate (E43) | mortgage spreads in advanced economies (G21) |
| US monetary policy shocks (E39) | leverage and asset prices (G19) |
| US monetary policy shocks (E39) | global financial stability (F65) |
| US monetary policy shocks (E39) | economic activity (E20) |