Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241191 
Year of Publication: 
2020
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2020-25
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We propose a new strength measure of the global financial cycle by estimating a regimeswitching factor model on cross-border equity flows for 61 countries. We then assess how the strength of the global financial cycle affects monetary policy independence, which is defined as the response of central banks' policy interest rates to exogenous changes in inflation. We show that central banks tighten their policy rates in response to an unanticipated increase in the inflation gap during times when global financial cycle strength is low. During times of high financial cycle strength, however, the responses of the same central banks to the same unanticipated changes in the inflation gap appear muted. Finally, by assessing the impact of different policy tools on countries' sensitivities to the global financial cycle, we show that using capital controls, macroprudential policies, and the presence of a flexible exchange rate regime can increase monetary policy independence.
Subjects: 
Monetary policy
Exchange rate regimes
Financial system regulation and policies
International financial markets
Business fluctuations and cycles
JEL: 
F32
E4
E5
G15
F42
G18
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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