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The Global Financial Cycle, Monetary Policies and Macroprudential Regulations in Small, Open Economies

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  • Gregory Bauer
  • Gurnain Pasricha
  • Rodrigo Sekkel
  • Yaz Terajima
Abstract
This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders. The resulting global financial cycle may be followed by a financial crisis that is quite costly. The cycle causes time variation in global risk premia in fixed income, equity and foreign exchange markets. In turn, time-varying global risk premia affect the transmission mechanisms of both conventional and unconventional monetary policies in small, open economies. While there are large costs associated with financial crises, the paper summarizes new work showing that the central banks’ leaning against the effects of the global financial cycle would typically be too costly. The paper concludes with some suggestions for the formation of macroprudential policies that are designed to offset the financial imbalances that grow during the boom phase of the cycle.

Suggested Citation

  • Gregory Bauer & Gurnain Pasricha & Rodrigo Sekkel & Yaz Terajima, 2016. "The Global Financial Cycle, Monetary Policies and Macroprudential Regulations in Small, Open Economies," Staff Working Papers 16-38, Bank of Canada.
    • Handle: RePEc:bca:bocawp:16-38
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    Cited by:

    1. Łukasz Kurowski & Paweł Smaga, 2018. "Monetary Policy and Cyclical Systemic Risk - Friends or Foes?," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(5), pages 522-540.
    2. Hassan Dargahi & Mehdi Hadian, 2022. "Oil shocks, financial stability and implementing macroeconomics and macro‐prudential policies in an oil‐exporting economy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2481-2496, April.
    3. Scheubel, Beatrice & Stracca, Livio & Tille, Cédric, 2019. "The global financial cycle and capital flow episodes: a wobbly link?," Working Paper Series 2337, European Central Bank.
    4. Mundra, Sruti & Bicchal, Motilal, 2024. "Financial cycle comovement with monetary and macroprudential policy and global factors: Evidence from India," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    5. Xing Zhang & Fengchao Li & Zhen Li & Yingying Xu, 2018. "Macroprudential Policy, Credit Cycle, and Bank Risk-Taking," Sustainability, MDPI, vol. 10(10), pages 1-18, October.
    6. Kurowski, Łukasz & Rogowicz, Karol, 2018. "Are business and credit cycles synchronised internally or externally?," Economic Modelling, Elsevier, vol. 74(C), pages 124-141.
    7. Patrik Kupkovic & Martin Suster, 2020. "Identifying the Financial Cycle in Slovakia," Working and Discussion Papers WP 2/2020, Research Department, National Bank of Slovakia.
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    More about this item

    Keywords

    International financial markets; Financial stability; Housing; Monetary policy framework;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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