Working Paper: NBER ID: w24677
Authors: Scar Jorda; Moritz Schularick; Alan M. Taylor; Felix Ward
Abstract: This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. These fluctuations are transmitted across both fixed and floating exchange rate regimes, but the effects are more muted in floating rate regimes.
Keywords: financial cycles; risk premiums; US monetary policy; global synchronization
JEL Codes: E50; F33; F42; F44; G12; N10; N20
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 risk appetite (G40) |
| fluctuations in risk premiums (G19) | synchronization of equity prices (G19) |
| synchronization of equity prices (G19) | global risk appetite (G40) |
| US monetary policy (E52) | equity prices internationally (G15) |
| US monetary policy (E52) | synchronization of risk-taking (G41) |
| comovement in equity return premiums (G12) | synchronization of equity prices (G19) |