By Maurice Obstfeld and Mahvash S. Qureshi

October 27, 2017

The boom and bust in cross-border capital flows around the global financial crisis, and in its aftermath, have rekindled debates on the existence and implications of a “global financial cycle.”

The traditional open-economy (“Mundell-Fleming”) model postulates that countries face a “trilemma”: a trade-off among the objectives of exchange rate stability, free capital mobility, and independent monetary policy. If a country chooses exchange rate stability and free capital mobility, it must give up monetary policy autonomy. Conversely, an independent monetary policy in the presence of free capital flows is possible through exchange rate flexibility.

Yet the repeated surges and reversals in capital flows that have often ended in debilitating crises—even in countries with flexible exchange rate regimes—have raised doubts about the degree of autonomy that flexible exchange rates confer, and the ability of open economies to escape the cycle amid rising financial integration.

Against this backdrop, the theme of this year’s IMF Jacques Polak Annual Research Conference on November 2–3 is “The Global Financial Cycle.” The conference brings together contributions by leading experts on the topic—from both within and outside the IMF—to improve our understanding of a range of issues, including the causes and consequences of the global financial cycle, the transmission channels of global financial shocks, and the role of domestic policies in dampening the impact of global shocks.

Trade Policy and International Capital Mobility

Barry Eichengreen, Professor of Economics and Professor of Political Science at the University of California, Berkeley, and a past president of the Economic History Association, will deliver the keynote Mundell-Fleming Lecture, titled, “Trade Policy and the Macroeconomy.” Barry will analyze the effects of trade policy in a world of high financial integration and flexible exchange rates—from the perspective of both short-term fluctuations, as well as long-term economic growth. 

Global Financial Cycle: Causes, Consequences, and Policies

 Fourteen other papers at the conference will examine a broad spectrum of issues. A historical perspective of global financial cycles can shed light on the synchronicity of financial and real cycles, and the importance of macroeconomic policies in the major economies in driving these cycles. Transmission channels of global financial shocks, especially the exchange rate, also matter. Financial openness brings with it real and distributional effects that are important to understand. And it is critical to assess the policy tools available to small open economies to better manage financial cycles, and reap the benefits of financial openness while minimizing the risks.

In addition to the Mundell-Fleming Lecture, the first day of the conference will feature two special events—opening remarks by Christine Lagarde, IMF Managing Director, and a luncheon speech by Richard Berner, Director, Office of Financial Research, U.S. Department of the Treasury. Richard’s talk, titled,Globalization and Financial Stability,” will focus on designing the financial stability toolkit in an increasingly financially interconnected world.

The conference will conclude with an Economic Forum. A panel of eminent experts—Benoît Coeuré (European Central Bank), José De Gregorio (University of Chile and Peterson Institute for International Economics), Rakesh Mohan (Yale Jackson Institute for Global Affairs), and Hélène Rey (London Business School)—will share their perspectives on the drivers and characteristics of global financial cycles, policy autonomy in small open economies, and the scope for international policy cooperation in building safer and more inclusive financial systems.

As in the past, we hope that the research presentations and discussions at this year’s Annual Research Conference will stimulate an informed debate, and open promising avenues for further research. We also hope that you will read the papers posted online, and join us via the webcasts of the IMF Managing Director’s opening remarks, the Mundell-Fleming Lecture, and the Economic Forum at www.imf.org/ARC, and on Twitter (#ARCPolak).