Spillovers in advanced and emerging countries
In this paper Cecchetti and al. explore the links between the duration of monetary easing and the buildup of leverage in nearly 1,000 publicly listed financial firms in 21 countries from 1998 to 2014. They find that Fed policy easing has a bigger impact on the leverage level of non-US intermediaries than domestic policy easing. This is especially true in countries with higher levels of financial development since transmission mechanisms are more efficient and there are greater opportunities for risk-taking behavior. On the other hand, Fed’s easing effect on leverage is much less in countries that are more financially integrated and are more open to trade.
U.S. or Domestic Monetary Policy: Which Matters More for Financial Stability?
Authors: Stephen G. Cecchetti, Tommaso Mancini-Griffoli, Machiko Narita, Ratna Sahay
From: Brandeis University, IMF
Fed policy and multilateralism
Cross-border capital flows, whether pushed by sending countries or pulled by receiving countries, have been a source of financial fragility. We argue in this paper that even if countries at either end of the flows follow reasonable policies, the nature of the expansion in liquidity in the up-cycle may, by increasing leverage and reducing pledgeability, set the stage for a costly downturn. In a world where nationalism is on the rise, such spillovers create an environment that is prone to misunderstanding and potentially conflict. Sending countries may see reserve build-up in receiving countries as unfair exchange rate manipulation, while receiving countries may feel indignant that they have to assume full responsibility for managing the collateral effects of industrial country monetary policies.
The Spillovers from Easy Liquidity and the Implications for Multilateralism
Authors: Douglas W. Diamond, Yunzhi Hu, Raghuram G. Rajan
From: University of Chicago, University of North Carolina
