nep-ifn New Economics Papers
on International Finance
Issue of 2015‒05‒22
four papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Financial Flows and the International Monetary System By Passari, Evgenia; Rey, Hélène
  2. Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence By Hélène Rey
  3. The global implications of diverging monetary policy settings in advanced economies By Dudley, William
  4. How Has the Global Financial Crisis Affected Syndicated Loan Terms in Emerging Markets?: Evidence from China By Guglielmo Maria Caporale; Suman Lodh; Monomita Nandy

  1. By: Passari, Evgenia; Rey, Hélène
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    Keywords: financial integration; monetary policy
    JEL: E5 F3
    Date: 2015–05
  2. By: Hélène Rey
    Abstract: There is a global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symptoms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country, which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime. For the past few decades, international macroeconomics has postulated the “trilemma”: with free capital mobility, independent monetary policies are feasible if and only if exchange rates are floating. The global financial cycle transforms the trilemma into a “dilemma” or an “irreconcilable duo”: independent monetary policies are possible if and only if the capital account is managed. So should policy restrict capital mobility? Gains to international capital flows have proved elusive whether in calibrated models or in the data. Large gross flows disrupt asset markets and financial intermediation, so the costs may be very large. To deal with the global financial cycle and the “dilemma”, we have the following policy options: ( a) targeted capital controls; (b) acting on one of the sources of the financial cycle itself, the monetary policy of the Fed and other main central banks; (c) acting on the transmission channel cyclically by limiting credit growth and leverage during the upturn of the cycle, using national macroprudential policies; (d) acting on the transmission channel structurally by imposing stricter limits on leverage for all financial intermediaries.
    JEL: E5 F02 F33 G15
    Date: 2015–05
  3. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Panel Remarks at the Sixth High Level Conference on the International Monetary System: Monetary Policy Challenges in a Changing World, Zurich, Switzerland.
    Keywords: emerging market economies (EMEs); normalization; lift-off; unconventional monetary policy; transparency; global capital flows; foreign exchange; financial asset prices
    JEL: E58
    Date: 2015–05–12
  4. By: Guglielmo Maria Caporale; Suman Lodh; Monomita Nandy
    Abstract: This paper examines the impact of the recent global financial crisis on the cost of debt capital (syndicated loans) in a leading emerging market, namely China, using difference-in-differences and GARCH approaches. Before the crisis China adopted banking reforms allowing entry of foreign banks and more domestic participation in the syndicated loan market. As a result, during the crisis the volume of syndicated loans grew steadily, in contrast to other countries. In addition, the amount of foreign syndicated loans decreased and average maturity increased compared to the precrisis period. Our findings provide useful information to policy makers to devise effective responses to financial crises.
    Keywords: Loan Spread, Loan Amount, Loan Maturity, China, Financial Crisis
    JEL: G21 G32 P34
    Date: 2015

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