Hélène Rey — The Global Financial System, the Real Rate of Interest and a Long History of Boom-Bust Cycles

Brad DeLong directs attention to:

Abstract

Financial cycles strongly determine real short-term interest rates. Wealth increases rapidly during financial booms, faster than consumption itself. As a consequence, the consumption to wealth ratio declines, as happened in the “Roaring 20s” and the “Exuberant 2000s”. In the subsequent busts, savings increase and keep real interest rates low. The related global financial cycle constrains monetary policy independence, even for countries with flexible exchange rates, transforming the Mundellian trilemma into a dilemma. Tackling these issues calls for combina- tions of monetary and fiscal policy coordination, macro-prudential policies, and possibly capital controls. It also means considering the role of the US as a provider of safe assets, and asking whether a multipolar system would be advantageous.

Andrew Crockett Memorial Lecture: The Global Financial System, the Real Rate of Interest and a Long History of Boom-Bust Cycles. ∗
Hélène Rey, London Business School, NBER and CEPR
July 3, 2017