In “US monetary policy and the global financial cycle” (Miranda-Agrippino and Rey (2018)) we show that US monetary policy shocks induce co-movements in the international financial variables that characterize the “Global Financial Cycle” a concept introduced in Rey (2013). One global factor explaining an important share of the variation of risky asset prices around the world decreases significantly after a US monetary contraction. Monetary tightening in the US leads 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.
In “International Channels of Transmission of Monetary Policy and the Mundellian Trilemma” (2016), I show 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. I perform the analysis for Canada, Sweden, New Zealand and the UK, which are all advanced economies having adopted inflation targeting regimes (and flexible exchange rates) as their policy framework.
In "Monetary policy on the Capitals of Capital” (Gerko and Rey (2017)) we analyse the transmission of monetary policy in two important financial centres, the United States and the United Kingdom. Studying the responses of mortgage and corporate spreads, we find evidence in favour of an important financial channel in both countries. Our identification strategy allows us to study the effect of movements in the policy instruments and forward guidance, broadly defined. We also analyse international financial spillovers, which we find to be asymmetric.
In “Financial Cycles with Heterogenous Intermediaries” (Coimbra and Rey (2018)) we develop a dynamic macroeconomic model with financial intermediaries with different degrees of risk taking ability and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability.
