Working Paper: NBER ID: w21852
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: Monetary Policy; Global Financial Cycle; Mundellian Trilemma
JEL Codes: F3; F33; F41
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) | financial conditions in inflation-targeting economies (E52) |
| 20 basis point tightening in the US one-year rate (E43) | mortgage spreads in advanced economies (G21) |
| US monetary policy shocks (E39) | domestic financial conditions in countries with flexible exchange rates (F31) |