Published Papers

Abstract:
We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.

*ERC Advanced Grant 695722

Abstract:
We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, and currencies. Our equilibrium model of incomplete foreign exchange (FX) risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity.

*This material is based upon work supported by ERC Advanced Grant 695722

Abstract:
We review the literature on the empirical characteristics of the global financial cycle and associated stylized facts on international capital flows, asset prices, risk aversion and liquidity in the financial system. We analyse the co-movements of global factors in asset prices and capital flows with commodity prices, international trade and world output as well as the sensitivity of different parts of the world to the Global Financial Cycle. We present evidence of the causal effects of the monetary policies of the US Federal Reserve, the European Central Bank and of the People's Bank of China on the Global Financial Cycle. We then assess whether the 2008 financial crisis has altered the transmission channels of monetary policies on the Global Financial Cycle. Finally, we discuss the theoretical modelling of the Global Financial Cycle and avenues for future research.

*ERC Advanced Grant 695722

Abstract:
Before the 2008 crisis, the cross-sectional skewness of banks' leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks' risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.

* Hélène Rey thanks the ERC for financial support (ERC Advanced Grant 695722).

Abstract:
US monetary policy shocks induce comovements in the international financial variables that characterize the "Global Financial Cycle." One global factor explaining an important share of the variation of risky asset prices around the world decreases significantlycantly after a US monetary contraction. Monetary tightening in the US leads to significant deleveraging of global financial intermediaries, a decline in the provision of domestic credit globally, strong retrenchments of international credit flows, and tightening of foreign financial conditions. Countries with floating exchange rate regimes are subject to similar financial spillovers.

*This paper is a revised version of "World Asset Markets and the Global Financial Cycle". Helene Rey thanks the ERC for financial support (ERC Advanced Grant 695722).

Abstract:
The Gobal Financial Cycle denotes fluctuations in financial activity on a global scale (Rey, 2013). It is characterized by the comovements of risky asset prices, leverage of financial intermediaries, credit growth and gross capital flows around the world.

*The Funding of the ERC (Advanced Grant 695722) is gratefully acknowledged.

Abstract:
We revisit the debate on the benefits of financial integration in a two-country neoclassical growth model with aggregate uncertainty. We account simultaneously for gains from a more efficient apital allocation and gains from risk sharing -|together with their interaction. Using global numerical methods allows us to do meaningful welfare comparisons along the transition paths. We find small gains from integration, even for riskier and capital scarce emerging economies. These countries import capital for efficiency reasons before exporting it for self -insurance, leading to capital flows and growth reversals along the transition. This opens the door to a richer set of empirical implications than
previously considered in the literature.

*This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows"

Abstract:
International currencies fulfill different roles in the world economy with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers, of the exorbitant privilege, and analyse the emergence of a new `Triffin Dilemma'.

*Helene Rey thanks the ERC for financial support (ERC Advanced Grant 695722).

Abstract:
In Coimbra and Rey (2017) we develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries. We test empirically in a broad panel of countries the implication that credit creation is more elastic to funding costs when the distribution of leverage in the banking system is more positively skewed.

*Rey thanks the ERC for financial support.

Abstract:
The importance of financial markets and international capital flows has increased greatly since the 1990s. How does this affect the effectiveness of monetary policy? We analyse the transmission of monetary policy in two important financial centres, the United States and the United Kingdom. Studying the responses of mortgage and corporate spreads, we find evidence in favour of an important financial channel in both countries. Our identification strategy allows us to study the effect of movements in the policy instruments and forward guidance, broadly defined. We also analyse international financial spillovers, which we find to be asymmetric.

*Helene Rey thanks the ERC for financial support (ERC Advanced Grant 695722)

Abstract:
The current environment is characterized by low real rates and by policy rates close to or at their lower bound in all major financial areas. We analyze these unusual economic conditions from a historical perspective and draw some implications for external imbalances, safe asset demand and the process of external adjustment.

Abstract:
This lecture argues that the Global Financial Cycle is a challenge for the validity of the Mundellian trilemma. I present evidence that US monetary policy shocks are transmitted internationally and affect financial conditions even in inflation targeting economies with large financial markets. Hence flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows.

This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows".

Abstract:
We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.

Sargan Lecture, Royal Economic Society 2014. This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows".

Abstract:
There is a 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. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symptoms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country, which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime.

Paper presented at the 25th Jackson Hole symposium, Wyoming, August 2013: "Global Dimensions of Unconventional Monetary Policy".

Abstract:
We provide an overview of the recent developments of the literature on the determinants of long term capital flows, global imbalances and valuation effects. We present the main stylized facts of the new international financial landscape in which external balance sheets of countries have grown in size and discuss implications for the international monetary and financial system.

*This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows"

Abstract:
We study the dynamics of capital inflows, leverage and credit growth in carry trade economies.

This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows".

Abstract:
Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modelling that incorporate international portfolio choices in standard two-country general equilibrium models.

This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows".

Abstract:
This paper studies the geography of wealth transfers between 2007Q4 and 2008Q4, at the height of the global financial crisis.

*This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows".

Abstract:
The risky steady-state is the point where agents choose to stay at a given date if they

expect future risk and if the realization of shocks is 0 at this date.

*This material is based upon work supported by the European Research Council grant number 210584 on "Countries' external balance sheets, dynamics of international adjustment and capital flows".

Abstract:
We study television prices across European countries and regions. Quality as measured by observable characteristics of televisions accounts for a large share of the international dispersion in prices. Rich economies tend to consume higher-quality goods, but sizeable international price differentials exist even for identical televisions. The valuation of brands differs significantly across borders. We also discuss pass through.

^The paper is part of the project “Exchange Rates, International Relative Prices, and Macroeconomic Models”, funded by the ESRC (grant no.L138 25 1043).

Abstract:
This paper presents new stylized facts on the distribution of the home bias at the fund level.

Abstract:
We explore the implications of a country’s external constraint for the dynamics of net foreign assets, returns and exchange rates. Deteriorations in external accounts imply future trade surpluses (trade channel) or excess returns on the net foreign portfolio (valuation channel). Using a new dataset on US gross external positions, we find that stabilizing valuation effects contribute 27% of the cyclical external adjustment. Our approach has asset pricing implications: external imbalances predict net foreign portfolio returns one-quarter to two-years ahead and net export growth at longer horizons. The exchange rate is forecastable in and out-of-sample at one quarter and beyond.

**This material is based upon work supported by the National Science Foundation under Grant No. 0519217.

Abstract:
We analyse the structure of US external assets and liabilities since 1952 and discover an "exorbitant privilege".

**This material is based upon work supported by the National Science Foundation under Grant No. 0519217.

Abstract:
This paper develops a theory of financial crisis based on the demand side of the economy. We analyze the impact of financial and trade globalizations on asset prices, investment and the possibility of self-fulfilling financial crashes. Financial and trade globalizations have different effects on asset prices, investment and income in the emerging market and in the industrialized country. Whereas trade globalization always has a positive effect on the emerging market, financial globalization may not, especially when trade costs are high. For intermediate levels of financial transaction costs and high levels of trade costs, pessimistic expectations can be self-fulfilling and may lead to a collapse in demand for goods and assets of the emerging market.

Abstract:
We show strong theoretical and empirical links between equity and exchange rate markets. We discover the 'uncovered equity parity' relation.

Abstract:
Heterogeneity in the dynamics of sectoral prices explains why aggregate price indices mean-revert slowly. When we account for this heterogeinity, the PPP puzzle is no more.

^The paper is part of the project “Exchange Rates, International Relative Prices, and Macroeconomic Models”, funded by the ESRC (grant no.L138 25 1043).

Abstract:
We show that the gravity model describes very well the pattern of international trade in assets. We link this result to information and familiarity effects.

Abstract:
We show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions. Information asymmetries are key to determine the geographical pattern of asset trade. And corporate, government bonds and equities all have different information content.

Abstract:
I show how network externalities and the pattern of international trade determine the internationalisation of currencies.

Abstract:
We present evidence on non-linear adjustment for sectoral real exchange rates and link our results to economic characteristics.

Abstract:
We study the links between equity and exchange rate markets using a VAR with sign restrictions.

Abstract:
We study the effect of market segmentation and size of financial areas on stock market development and asset prices.

Abstract:
We study the effect of financial integration and currency union on the location of stock exchanges and on welfare.

^ Research funded by the Fondation Banque de France.

Abstract:
We spell out the factors influencing the competition between the euro and the dollar and discuss different scenarios.

Abstract:
What is the share of euro financial flows in the world?

Abstract:
This paper takes a systematic look at the portfolio choice problem faced by investment banks or funds investing in transition economies.