Gone with the Wind: Monetary Policy and the Global Financial Cycle

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Abstract:

This paper builds and estimates a small open economy New Keynesian DSGE model, specified with an international banking sector, in order to explore the effectiveness of alternative monetary police regimes to isolate the domestic economy from global financial cycles. Using an increase to the Federal Funds Rate as a proxy for a sudden stop shock to a small open economy, I find that the Mundellian policy trilemma still persists. However, even a monetary authority adopting a floating exchange rate cannot fully buffer the effects of a global financial shock due to the tight integration of global financial markets.

IRFs to an annualised 1% shock to the Foreign Interest Rate

Variables are expressed in percent deviations from their non-stochastic steady state values. Infation and interest rates are annualised.

Seminars and Presentations

2021: University of Oxford (internal seminar)
2023: University of Pavia (internal seminar), London Business School (Transatlantic Doctoral Conference), University of Oxford (IFABS Conference)

Citation:

Murakami, David, Gone with the Wind: Monetary Policy and the Global Financial Cycle (31 December 2025). Available at SSRN: https://ssrn.com/abstract=4198695 or http://dx.doi.org/10.2139/ssrn.4198695