The Global Financial Cycle and US monetary policy in an interconnected world

• Published in: Journal of international money and finance 2021-07, Vol.115, p.102395, Article 102395
• Main Authors: Dées, Stéphane, Galesi, Alessandro
• Format: Article
• Language: English
• Subjects: Economics and Finance; Global financial cycle; Humanities and Social Sciences; Monetary policy spillovers; Network effects; Trilemma
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2021.102395

•Expansionary US monetary policy contributes to the Global Financial Cycle.•Economies with floating exchange rates are not fully insulated from US shocks.•Spillovers reinforced by the complex network of cross-country interactions.•Amplification increases as countries get more globally integrated over time. We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macro-financial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.