|
|
|
| The Global Financial Cycle, US Monetary Policy, and the Impossible Trinity |
| ZHANG Liqing, ZHONG Qian
|
| School of Finance, Central University of Finance and Economics |
|
|
|
Abstract The notion of the Impossible Trinity holds that one country can only fulfill two of the following three conditions: a fixed exchange rate system, the free flow of capital, and independence of monetary policy. However, due to the continuous development of financial globalization, more and more studies have found that US monetary policy can influence peripheral countries' economies through the flow of capital, bank balance sheet, foreign exchange reserves and other channels because of other countries' preference for the dollar. A flexible exchange rate does not ensure the independence of monetary policy. Rey (2013) found increasing global synchronization among capital flows, asset prices, financial leverage, and credit growth.
Rgy(2013) defines this synchronization as the “Global Financial Cycle,” which is negatively related to VIX. The Global Financial Cycle has been widely discussed. Many studies acknowledge its existence, and use VIX as the proxy variable to study the relationship between the Global Financial Cycle and the independence of monetary policy. The research methods of these studies are SVAR or panel regression; few discuss the theoretical causes of the Global Financial Cycle. Therefore, this paper constructs a two-country DSGE model including bank and financial frictions to theoretically analyze the causes of the Global Financial Cycle and discuss whether the monetary policies of peripheral countries with flexible exchange rates are independent.
A partial equilibrium analysis based on the theoretical derivation finds that the policy interest rate affects the balance sheets and decision-making behavior of banks. As a result, the equity asset ratio, market interest rate, and bank survival rate change with the policy interest rate. Therefore, the cause of the Global Financial Cycle is the synchronization of the policy interest rates of various countries. Through impulse response analysis, it is found that even countries with flexible exchange rates need to change their monetary policy rate in the same direction as the Federal Funds Rate to maintain domestic financial and economic stability.
Counterfactual simulation of flexible exchange rate countries with different degrees of capital liberalization shows that the spillover effect of US monetary policy through the Business Cycle is opposite of the spillover effect through the Global Financial Cycle. The impact and transmission speed of the Global Financial Cycle is far greater than that of the Business Cycle. Take the loose monetary policy of the United States as an example. The rapid availability of domestic credit in peripheral countries leads to overinvestment, overcapacity, and oversupply of commodities. The economy shifts from the real to the fictitious, and the real economy declines because of poor return on investment. The real economy is asynchronous with the financial cycle. To deal with this asynchrony, peripheral countries must also loosen monetary policy to restrain capital inflow. The synchronization of monetary policies in different countries leads to the synchronization of financial markets, which is to say the Global Financial Cycle.
Further research finds that as international investment increases, the impact of the valuation effect is so large that the exchange rate cannot completely offset the central country's spillover effect. The valuation effect is one reason why a flexible exchange rate country without capital control has no monetary policy independence. The depth of the financial market and the independence of monetary policy are complementary. US monetary policy spillover has a greater impact on countries with less developed financial markets.
The conclusions of this study lead to the following suggestions. First, it is necessary to strengthen macro prudential supervision to restrain the excessive risk-taking behavior of financial institutions. Second, moderate capital control is workable, especially when the global financial market is in a boom period.
|
|
Received: 29 January 2019
Published: 09 March 2020
|
|
|
|
Corresponding Authors:
钟茜,博士研究生,中央财经大学金融学院，E-mail:18146558362@163.com.
|
|
|
| [1] |
邓创和徐曼,2014,《中国的金融周期波动及其宏观经济效应的时变特征研究》,《数量经济技术经济研究》第9期,第75～91页。
|
| [2] |
江曙霞和陈玉婵,2012,《货币政策、银行资本与风险承担》,《金融研究》第4期,第1～16页。
|
| [3] |
金雪军、黄滕和祝宇,2013,《中国商品市场名义价格粘性的测度》,《经济研究》第9期,第85～98页。
|
| [4] |
陆简,2017,《避险情绪、货币乘数与二元悖论》,《国际金融研究》第6期,第3～12页。
|
| [5] |
郑振龙和汤文玉,2011,《波动率风险及风险价格——来自中国A股市场的证据》,《金融研究》第4期,第143～157页。
|
| [6] |
Aizenman, J., M. Chinn, and H. Ito. 2016. “Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions”, Journal of International Money and Finance, 68 (3):298～330.
|
| [7] |
Bernanke, B., M. Gertler, and S. Gilchrist. 1996. “The Financial Accelerator in a Quantitative Business Cycle Framework”, Review of Economics and Statistics, 78(1):1～15.
|
| [8] |
Bocola, L. 2016. “The Pass-through of Sovereign Risk”, Journal of Political Economy, 124(4):879～926.
|
| [9] |
Bruno, V., and H. S. Shin. 2015. “Cross Border Banking and Global Liquidity”, Review of Economic Studies, 82(2):535～564.
|
| [10] |
Calvo, G. A., L. Leiderman, and C. Reinhart. 1996. “Capital Flows to Developing Countries in the 1990s: Causes and Effects”, Journal of Economic Perspectives, 10(1):123～139.
|
| [11] |
Cerutti, E., S. Claessens, and A. K. Rose. 2017. “How Important is the Global Financial Cycle？ Evidence from Capital Flows”, NBER Working Paper No. 23699.
|
| [12] |
Chinn, M. D., and S. J. Wei. 2013. “A Faith-Based Initiative Meets the Evidence: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment？” The Review of Economics and Statistics, 95(1):168～184.
|
| [13] |
Coimbra, N., and Hélène Rey. 2017. “Financial Cycles with Heterogeneous Intermediaries”, NBER Working Paper No.23245.
|
| [14] |
Dell’Ariccia, G., L. Laeven, and R. Marquez. 2014. “Real Interest Rates, Leverage, and Bank Risk-Taking”, Journal of Economic Theory, 149(1):65～99.
|
| [15] |
Dooley, M., D. Folkerts-Landau, and P. Garber. 2009. “Bretton Woods II Still Defines the International Monetary System”, Pacific Economic Review, 14 (3):297～311.
|
| [16] |
Edwards, S. 2015. “Monetary Policy Independence under Flexible Exchange Rates: An Illusion？” World Economy, 38(5):773～787.
|
| [17] |
Eichengreen, B., A. Mehl, and Livia Chitu. 2017. “How Global Currencies Work: Past, Present, and Future,” Princeton University Press.
|
| [18] |
Fostel, A., J. Geanakoplos, and G. Phelan. 2019. “Global Collateral and Capital Flows”, NBER Working Paper No. 25583.
|
| [19] |
Gebka, B., and D. Serwa. 2007. “Intra-and Inter-regional Spillovers between Emerging Capital Market Around the World”, International Business and Finance, 21(2):203～221.
|
| [20] |
Georgiadis, G., and Feng Zhu. 2019. “Monetary Policy Spillovers, Capital Controls and Exchange Rate Flexibility, and the Financial Channel of Exchange Rates”, European Central Bank Working Paper No. 2267.
|
| [21] |
Ghosh, A. R., M. S. Qureshi, J. Kim, and J. Zalduendo. 2014. “Surges”, Journal of International Economics, 92 (2):266～285.
|
| [22] |
Han, X., and Shang-Jin Wei. 2014. “Policy Choices and Resilience to International Monetary Shocks”, Global Economic Review, 43 (4):319～337.
|
| [23] |
Han, X., and Shang-Jin Wei. 2018. “International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma”, Journal of International Economics, 110(1):205～219.
|
| [24] |
Kharroubi, E., and F. Zampolli. 2016. “Monetary Independence in a Financially IntegratedWorld: What Do Measures of Interest Rate Co-movement Tell Us？” BIS Working Papers No.88.
|
| [25] |
Klein, M. W., and J. C. Shambaugh. 2015. “Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy”, American Economic Journal: Macroeconomics, 7 (4):33～66.
|
| [26] |
Lane, P. R., and J. C. Shambaugh. 2010. “Financial Exchange Rates and International Currency Exposures”, American Economic Review, 100 (1):518～540.
|
| [27] |
Miyakoshi, Tatsuyoshi. 2013. “Spillovers of Stock Return Volatility to Asian Equity Market from Japan and the US”, Journal of International Financial Markets, Institutions and Money, 13(4):383～399.
|
| [28] |
Nier, E., T. S. Sedik, and T. Mondino. 2014. “Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed？” IMF Working Paper No. 14/196.
|
| [29] |
Obstfeld, M. 2015. “Trilemmas and Tradeoffs: Living with Financial Globalization”, BIS Working Papers No. 480.
|
| [30] |
Passari, E., and H. Rey. 2015. “Financial Flows and the International Monetary System”, Economic Journal, 125 (5):675～698.
|
| [31] |
Rappoport, V. 2009. “Persistence of Dollarization After Price Stabilization”, Journal of Monetary Economics, 56 (7):979～989.
|
| [32] |
Rey, H. 2013. “Dilemma Not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, NBER Working Paper No. 21162.
|
| [33] |
Schularick, M., and A. M. Taylor. 2012. “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008”, American Economic Review, 102 (2):1029～1061.
|
| [34] |
Tong, H., and S. J. Wei. 2011. “The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis”, Review of Financial Studies, 24(6):2023～2052.
|
|
|
|
