| Title | Monetary and financial policies |
|---|---|
| Contributor | Hélène Rey (author) |
| DOI | https://doi.org/10.31389/lsepress.tlc.g |
| Landing page | https://doi.org/10.31389/lsepress.tlc.g |
| License | https://creativecommons.org/licenses/by-nc/4.0/ |
| Publisher | LSE Press |
| Published on | 2025-10-16 |
| Short abstract | The Washington Consensus helped forge a world view in which opening borders to capital flows was seen as an important way to increase economic efficiency. In the past decades, evidence accumulated of the shortcomings of a largely unmanaged financial system in which the volatility of capital flows was still seen as an exogenous feature of the world economy. This chapter sets the stage by discussing the characteristics of the global financial cycle (GFC) and the role of the United States Federal Reserve, to then discuss the influence of this cycle on the pass-through of domestic monetary policy to market rates for emerging markets (EMs) and advanced economies. It then sets out the implications of limited monetary policy pass-through for the validity of the trilemma in international finance. The chapter calls for the systematic use of macroprudential policy tools in advanced and EMs alike to complement credible monetary policy frameworks. It also emphasises the importance of the development of local currency bond markets. In some cases, capital controls may also be useful. This chapter includes responses to Hélène Rey by Paul Tucker and Şebnem Kalemli-Özcan. |
| Long abstract | The Washington Consensus helped forge a world view in which opening borders to capital flows was seen as an important way to increase economic efficiency. In the past decades, evidence accumulated of the shortcomings of a largely unmanaged financial system in which the volatility of capital flows was still seen as an exogenous feature of the world economy. This chapter sets the stage by discussing the characteristics of the global financial cycle (GFC) and the role of the United States Federal Reserve, to then discuss the influence of this cycle on the pass-through of domestic monetary policy to market rates for emerging markets (EMs) and advanced economies. It then sets out the implications of limited monetary policy pass-through for the validity of the trilemma in international finance. The chapter calls for the systematic use of macroprudential policy tools in advanced and EMs alike to complement credible monetary policy frameworks. It also emphasises the importance of the development of local currency bond markets. In some cases, capital controls may also be useful. This chapter includes responses to Hélène Rey by Paul Tucker and Şebnem Kalemli-Özcan. |
| Language | English (Original) |
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Hélène Rey OBE, FBA is Lord Bagri Professor of Economics at London Business School. Formerly, she was Professor of Economics at Princeton University. Her research focuses on external imbalances, monetary policy and the financial sector, and the international monetary system. She introduced the idea of a global financial cycle and qualified the idea of the Mundellian Trilemma. She received numerous prizes including the Bernácer Prize, the Yrjö Jahnsson Award and the inaugural Birgit Grodal and Carl Menger Awards. She is a Fellow of the Econometric Society, a Foreign Member of the American Academy of Arts and Sciences and Foreign Honorary Member of the American Economic Association. She is an editor of the Annual Review of Economics and a vice president of CEPR. She is a member of the Bellagio Group, the Group of Thirty and of the external advisory group to the managing director of the IMF. She is on the Board of the Haut Conseil de Stabilité Financière. She is elected President of the EEA.
Sir Paul Tucker is a Research Fellow at the Mossavar-Rahmani Center for Business and Government at the HKS, writing at the intersection of political economy and political theory. He is author of Global Discord (Princeton University Press, 2022) and Unelected Power (PUP, 2018). He is working on a book applying David Hume’s political theory to today’s problems. From 1980 to 2013, he was a central banker.
Şebnem Kalemli-Özcan is Schreiber Family Professor of Economics at Brown University and the Director of the Global Linkages Lab. She is a Research Associate at the National Bureau of Economic Research (NBER) and a Research Fellow at the CEPR. Currently, she is the co-editor of American Economic Journal: Macroeconomics. She also serves at the economic advisory panels of the Federal Reserve Bank of New York and the Bank of International Settlements. Formerly, she was the Duisenberg Fellow at the European Central Bank, Lead Economist for the Middle East and North Africa Region of the World Bank, Houblon-Norman Fellow of Bank of England, Senior Policy Advisor at the IMF and the International Fellow of Council of Foreign Relations, where she is also an elected member. She is the first Turkish social scientist who has received the 2008 Marie Curie IRG prize aimed to reverse brain drain for her research on European financial integration. Her research focuses on the impact of global trade and financial linkages on economic fluctuations and growth.