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Money Matters: Global banks, safe assets and monetary autonomy

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  • Sergio Florez-Orrego

Abstract

This paper depicts an often neglected channel of transmission of monetary policy, namely international safety appetite, as an important source of production and risk-taking international monetary spillovers. The model features a local economy with exogenous financial frictions that lead firms to need both local and foreign financing to pay for their factors of production. Global and local risk-averse banks supply firms with risky loans while buying safe assets to governments to hedge themselves against equity shocks. Monetary policy shocks of a hegemon currency issuer affect returns obtained by banks for the risky loans they concede, altering these agents' risk pricing and balance sheet composition. Main results outline that global monetary policy tightening reduces the returns of risky global loans, inducing global banks to reduce risky loan creation, ultimately decreasing both production and consumption volatility internationally. Two more secondary results arise. First, local monetary authorities may counteract global monetary policy spillovers, but this will entail a trade-off between boosting production and reducing consumption volatility. Second, both global and local expansive monetary policy increase the demand for global safe assets, relaxing the budget constraint of monopolistic global safe asset issuers. Understanding the international safety appetite mechanism of transmission appears to be of critical importance as it may impact the effectiveness of monetary policy in open economies as well as its optimal design.

Suggested Citation

  • Sergio Florez-Orrego, 2021. "Money Matters: Global banks, safe assets and monetary autonomy," Documentos CEDE 19153, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:019153
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    File URL: https://repositorio.uniandes.edu.co/bitstream/handle/1992/49764/dcede2021-19.pdf
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    More about this item

    Keywords

    global currencies; monetary policy spillovers; exorbitant privilege.;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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