VOX – CEPR Policy Portal, 25 June 2018, by Òscar Jordà, Moritz Schularick, Alan Taylor, Felix Ward
Asset markets in advanced economies have become more integrated than ever before in the history of modern finance. This is especially true for global equities starting in the 1990s. This column argues that this increase in synchronisation is primarily driven by fluctuations in risk appetite rather than in risk-free rates, or in dividends. US monetary policy plays a major role in explaining such fluctuations, and this transmission channel affects economies with both fixed and floating exchange rates, although the effects are more muted in floating rate regimes.
The Global Crisis highlighted the need for an evolution in macroeconomic thinking. In addition to the urgency to integrate banking and finance into the basic architecture of macroeconomic models, one could add that there is also fundamental need to understand the financial cycle and its interplay with the business cycle. But is there a financial cycle at all? And if so, how has its operation in the global economy evolved? “[…]”
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