A new paper examines the global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. A key conclusion is that, because the determinants of the global cycle are effectively determined by Fed policy, the classic “policy trilemma” actually becomes a “dilemma”: independent monetary policies are possible if and only if the capital account is managed.
Dilemma not Trilemma:The Global Financial Cycle and Monetary Policy Independence, Hélène Rey, Aug 2013
The paper was presented at the 2013 Economic Policy Symposium organised by the FRB of Kansas City at Jackson Hole, Wyoming. Also highly readable is The Routes into and out of the Zero Lower Bound, Robert Hall, Aug 2013.