IMF Economic Review

, Volume 67, Issue 1, pp 109–150 | Cite as

Global Financial Cycles and Risk Premiums

  • Òscar JordàEmail author
  • Moritz Schularick
  • Alan M. Taylor
  • Felix Ward
Research Article


This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. While comovement of credit and house prices increased in line with growing real sector integration, comovement of equity prices has increased above and beyond growing real sector integration. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that US monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. These fluctuations are transmitted across both fixed and floating exchange rate regimes, but the effects are more muted in floating rate regimes.


Financial cycles Asset prices Equity return premium Policy spillovers Financial centers 

JEL Classification

E50 F33 F42 F44 G12 N10 N20 



  1. Adrian, Tobias, and Hyun Song Shin. 2009. Money, Liquidity, and Monetary Policy. American Economic Review 99 (2): 600–605.Google Scholar
  2. Aikman, David, Andrew G. Haldane, and Benjamin D. Nelson. 2014. Curbing the Credit Cycle. Economic Journal 125 (585): 1072–1109.Google Scholar
  3. Akerlof, George A., and Robert J. Shiller. 2010. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton: Princeton University Press.Google Scholar
  4. Alpanda, Sami, and Uluc Aysun. 2014. International Transmission of Financial Shocks in An Estimated DSGE Model. Journal of International Money and Finance 47: 21–55.Google Scholar
  5. Ammer, John, and Jianping Mei. 1996. Measuring International Economic Linkages with Stock Market Data. Journal of Finance 51 (5): 1743–1763.Google Scholar
  6. Bacchetta, Philippe, and Eric van Wincoop. 2013. Sudden Spikes in Global Risk. Journal of International Economics 89 (2): 511–521.Google Scholar
  7. Backus, David K., Patrick J. Kehoe, and Finn E. Kydland. 1992. International Real Business Cycles. Journal of Political Economy 100 (4): 745–775.Google Scholar
  8. Bekaert, Geert, Marie Hoerova, and Marco Lo Duca. 2013. Risk, Uncertainty and Monetary Policy. Journal of Monetary Economics 60 (7): 771–788.Google Scholar
  9. Bernanke, Ben S., and Kenneth N. Kuttner. 2005. What Explains the Stock Market’s Reaction to Federal Reserve Policy? Journal of Finance 60 (3): 1221–1257.Google Scholar
  10. Bjørnland, Hilde C., and Kai Leitemo. 2009. Identifying the Interdependence Between US Monetary Policy and the Stock Market. Journal of Monetary Economics 56 (2): 275–282.Google Scholar
  11. Bordalo, Pedro, Nicola Gennaioli, and Andrei Shleifer. 2012. Salience Theory of Choice Under Risk. Quarterly Journal of Economics 127 (3): 1243–1285.Google Scholar
  12. Bordo, Michael D., Barry Eichengreen, and Jongwoo Kim. 1998. Was There Really an Earlier Period of International Financial Integration Comparable to Today? NBER Working Paper 6738.Google Scholar
  13. Bordo, Michael D., and Thomas Helbling. 2003. Have National Business Cycles Become More Synchronized? NBER Working Paper 10130.Google Scholar
  14. Bruno, Valentina, and Hyun Song Shin. 2014. Cross-Border Banking and Global Liquidity. Review of Economic Studies 82 (2): 535–564.Google Scholar
  15. Bruno, Valentina, and Hyun Song Shin. 2015. Capital Flows and the Risk-Taking Channel of Monetary Policy. Journal of Monetary Economics 71: 119–132.Google Scholar
  16. Cagliarini, Adam, and Fiona Price. 2017. Exploring the Link Between the Macroeconmic and Financial Cycles. RBA Working Paper.Google Scholar
  17. Campbell, John Y. 1991. A Variance Decomposition for Stock Returns. Economic Journal 101 (405): 157–179.Google Scholar
  18. Campbell, John Y., and Robert J. Shiller. 1988. The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors. Review of Financial Studies 1 (3): 195–228.Google Scholar
  19. Canova, Fabio. 2005. The Transmission of US Shocks to Latin America. Journal of Applied Econometrics 20 (2): 229–251.Google Scholar
  20. Cassis, Youssef, Richard S. Grossman, and Catherine R. Schenk. 2016. The Oxford Handbook of Banking and Financial History. Oxford: Oxford University Press.Google Scholar
  21. Castelnuovo, Efrem, and Salvatore Nisticò. 2010. Stock Market Conditions and Monetary Policy in a DSGE Model for the US. Journal of Economic Dynamics and Control 34 (9): 1700–1731.Google Scholar
  22. Cerutti, Eugenio, Stijn Claessens, and Lev Ratnovski. 2014. Global Liquidity and Drivers of Cross-Border Bank Flows. IMF Working Paper 14/69.Google Scholar
  23. Cetorelli, Nicola, and Linda S. Goldberg. 2012. Banking Globalization and Monetary Transmission. Journal of Finance 67 (5): 1811–1843.Google Scholar
  24. Chadha, Jagjit S., Lucio Sarno, and Giorgio Valente. 2004. Monetary Policy Rules, Asset Prices, and Exchange Rates. IMF Economic Review 51 (3): 529–552.Google Scholar
  25. Chiţu, Livia, Barry Eichengreen, and Arnaud Mehl. 2014. When Did the Dollar Overtake Sterling as the Leading International Currency? Evidence from the Bond Markets. Journal of Development Economics 111: 225–245.Google Scholar
  26. Claessens, Stijn, M. Ayhan Kose, and Marco E. Terrones. 2011. Financial Cycles: What? How? When? NBER International Seminar on Macroeconomics 7 (1): 303–344.Google Scholar
  27. Cochrane, John H. 2005. Asset Pricing, Revised ed. Princeton: Princeton University Press.Google Scholar
  28. Dedola, Luca, and Giovanni Lombardo. 2012. Financial Frictions, Financial Integration and the International Propagation of Shocks. Economic Policy 27 (70): 319–359.Google Scholar
  29. Devereux, Michael B., and James Yetman. 2010. Leverage Constraints and the International Transmission of Shocks. Journal of Money, Credit and Banking 42 (s1): 71–105.Google Scholar
  30. Drehmann, Mathias, Claudio Borio, and Kostas Tsatsaronis. 2012. Characterising the Financial Cycle: Don’t Lose Sight of the Medium Term! BIS Working Papers 380.Google Scholar
  31. Driscoll, John C., and Aart C. Kraay. 1998. Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data. Review of Economics and Statistics 80 (4): 549–560.Google Scholar
  32. Dumas, Bernard, Campbell R. Harvey, and Pierre Ruiz. 2003. Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs? Journal of International Money and Finance 22 (6): 777–811.Google Scholar
  33. Ehrmann, Michael, Marcel Fratzscher, and Roberto Rigobon. 2011. Stocks, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission. Journal of Applied Econometrics 26 (6): 948–974.Google Scholar
  34. Engsted, Tom, and Carsten Tanggaard. 2004. The Comovement of US and UK Stock Markets. European Financial Management 10 (4): 593–607.Google Scholar
  35. Feis, Herbert. 1964. Europe, the World’s Banker, 1870–1914: An Account of European Foreign Investment and the Connection of World Finance with Diplomacy Before the War. New York: Augustus M. Kelley.Google Scholar
  36. Forbes, Kristin J., and Roberto Rigobon. 2002. No Contagion, Only Interdependence: Measuring Stock Market Comovements. The Journal of Finance 57 (5): 2223–2261.Google Scholar
  37. Fostel, Ana, and John Geanakoplos. 2008. Leverage Cycles and the Anxious Economy. The American Economic Review 98 (4): 1211–1244.Google Scholar
  38. Furlanetto, Francesco. 2011. Does Monetary Policy React to Asset Prices? Some International Evidence. International Journal of Central Banking 7 (3): 91–111.Google Scholar
  39. Galí, Jordi, and Luca Gambetti. 2015. The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence. American Economic Journal: Macroeconomics 7 (1): 233–257.Google Scholar
  40. Gennaioli, Nicola, and Andrei Shleifer. 2010. What Comes to Mind. Quarterly Journal of Economics 125 (4): 1399–1433.Google Scholar
  41. Gertler, Mark, and Peter Karadi. 2015. Monetary Policy Surprises, Credit Costs, and Economic Activity. American Economic Journal: Macroeconomics 7 (1): 44–76.Google Scholar
  42. Gürkaynak, Refet S., Brian Sack, and Eric T. Swanson. 2005. Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements. International Journal of Central Banking 1 (1): 55–93.Google Scholar
  43. Hamilton, James D. 2018. Why You Should Never Use the Hodrick-Prescott Filter. Review of Economics and Statistics 100 (5): 831–843.Google Scholar
  44. Harding, Don, and Adrian Pagan. 2002. Dissecting the Cycle: A Methodological Investigation. Journal of Monetary Economics 49 (2): 365–381.Google Scholar
  45. Hume, David. 1742. Of the Balance of Trade. In Essays: Moral, Political, and Literary, 1987th ed, ed. Eugene F Miller. Indianapolis: V. Liberty Fund Inc. chapter II.Google Scholar
  46. Ilzetzki, Ethan, Carmen M. Reinhart, and Kenneth S. Rogoff. 2017. Exchange Rate Arrangements Entering the 21st century: Which Anchor will Hold? NBER Working Paper 23134.Google Scholar
  47. Jordà, Òscar. 2005. Estimation and Inference of Impulse Responses by Local Projections. American Economic Review 95 (1): 161–182.Google Scholar
  48. Jordà, Òscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2017a. The Rate of Return on Everything, 1870-2015. NBER Working Paper 24112. Forthcoming in Quarterly Journal of Economics Google Scholar
  49. Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2015. Betting the House. Journal of International Economics 96: 2–18.Google Scholar
  50. Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2016. Macrofinancial History and the New Business Cycle Facts. NBER Macroeconomics Annual 31 (1): 213–263.Google Scholar
  51. Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2017. The Effects of Quasi-Random Monetary Experiments. NBER Working Paper 23074.Google Scholar
  52. Kahneman, Daniel, and Amos Tversky. 1979. Prospect Theory: An Analysis of Decision Under Risk. Econometrica 47 (2): 263–291.Google Scholar
  53. Kapetanios, George. 2008. A Bootstrap Procedure for Panel Data Sets with Many Cross-sectional Units. Econometrics Journal 11 (2): 377–395.Google Scholar
  54. Kim, Soyoung. 2001. International Transmission of US Monetary Policy Shocks: Evidence from VAR’s. Journal of Monetary Economics 48 (2): 339–372.Google Scholar
  55. Kindleberger, Charles P. 1978. Manias, Panics, and Crashes: A History of Financial Crises. New York: Wiley.Google Scholar
  56. Klein, Michael W., and Jay C. Shambaugh. 2008. The Dynamics of Exchange Rate Regimes: Fixes, Floats, and Flips. Journal of International Economics 75 (1): 70–92.Google Scholar
  57. Klein, Michael W., and Jay C. Shambaugh. 2015. Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy. American Economic Journal: Macroeconomics 7 (4): 33–66.Google Scholar
  58. Kollmann, Robert, Zeno Enders, and Gernot J. Müller. 2011. Global Banking and International Business Cycles. European Economic Review 55 (3): 407–426.Google Scholar
  59. Kuvshinov, Dmitry. 2019. The Time Varying Risk Puzzle. University of Bonn, Working Paper.Google Scholar
  60. Meller, Barbara, and Norbert Metiu. 2017. The Synchronization of Credit Cycles. Journal of Banking & Finance 82: 98–111.Google Scholar
  61. Michie, Ranald C. 1986. The London and New York stock Exchanges, 1850–1914. Journal of Economic History 46 (1): 171–187.Google Scholar
  62. Miranda-Agrippino, Silvia, and Hélene Rey. 2015. World Asset Markets and the Global Financial Cycle. NBER Working Paper 21722.Google Scholar
  63. Obstfeld, Maurice. 2014. Trilemmas and Trade-Offs: Living with Financial Globalization. BIS Working Paper 480.Google Scholar
  64. Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor. 2004. Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period. IMF Staff Papers 51 (1): 75–108.Google Scholar
  65. Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor. 2005. The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility. Review of Economics and Statistics 87 (3): 423–438.Google Scholar
  66. Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor. 2010. Financial Stability, the Trilemma, and International Reserves. American Economic Journal: Macroeconomics 2 (2): 57–94.Google Scholar
  67. Obstfeld, Maurice, and Alan M. Taylor. 2004. Global Capital Markets: Integration, Crisis, and Growth. Cambridge: Cambridge University Press.Google Scholar
  68. Quinn, Dennis P., and Hans-Joachim Voth. 2008. A Century of Global Equity Market Correlations. American Economic Review 98 (2): 535–540.Google Scholar
  69. Rigobon, Roberto, and Brian Sack. 2004. The Impact of Monetary Policy on Asset Prices. Journal of Monetary Economics 51 (8): 1553–1575.Google Scholar
  70. Schularick, Moritz, and Alan M. Taylor. 2012. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008. American Economic Review 102 (2): 1029–1061.Google Scholar
  71. Schüler, Yves Stephan, Paul Hiebert, and Tuomas A. Peltonen. 2015. Characterising the Financial Cycle: A Multivariate and Time-Varying Approach. ECB Working Paper 1846.Google Scholar
  72. Shambaugh, Jay C. 2004. The Effect of Fixed Exchange Rates on Monetary Policy. Quarterly Journal of Economics 119 (1): 301–352.Google Scholar
  73. Shiller, Robert J. 1981a. Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends? American Economic Review 71 (3): 421–436.Google Scholar
  74. Shiller, Robert J. 1981b. The Use of Volatility Measures in Assessing Market Efficiency. Journal of Finance 36 (2): 291–304.Google Scholar
  75. Shiller, Robert J. 2000. Irrational Exuberance. Wiley Online Library.Google Scholar
  76. Shin, Hyun Song. 2012. Global Banking Glut and Loan Risk Premium. IMF Economic Review 60 (2): 155–192.Google Scholar
  77. Ueda, Kozo. 2012. Banking Globalization and International Business Cycles: Cross-Border Chained Credit Contracts and Financial Accelerators. Journal of International Economics 86 (1): 1–16.Google Scholar
  78. Ward, Felix. 2018. Global Risk Taking, Exchange Rates, and Monetary Policy. Working Paper.Google Scholar

Copyright information

© International Monetary Fund 2019

Authors and Affiliations

  • Òscar Jordà
    • 1
    • 2
    Email author
  • Moritz Schularick
    • 3
    • 4
  • Alan M. Taylor
    • 4
    • 5
    • 6
  • Felix Ward
    • 7
  1. 1.Federal Reserve Bank of San FranciscoSan FranciscoUSA
  2. 2.Department of EconomicsUniversity of CaliforniaDavisUSA
  3. 3.Department of EconomicsUniversity of BonnBonnGermany
  4. 4.Center of Economic Policy ResearchLondonUK
  5. 5.Graduate School of Management and Department of EconomicsUniversity of CaliforniaDavisUSA
  6. 6.National Bureau of Economic Research CambridgeUSA
  7. 7.Erasmus School of EconomicsErasmus University Rotterdam RotterdamThe Netherlands

Personalised recommendations