Speaker: Paul Fontanier
Affiliation: Yale SOM
Date and time: Tuesday, March 11, 202511:30 (Santiago, GMT-03:00)
Location: Sala Constitucion at the Central Bank of Chile, Morandé 115, second floor.
Registration: seminarios@bcentral.cl

Abstract: This paper proposes a tractable model of the Global Financial Cycle and studies its welfare implications for emerging market economies (EMEs). When local firms issue debt denominated in dollars, central banks must increase their policy rate as the U.S. tightens in order to offset balance sheet effects stemming from the depreciation of their currency. If global financial markets are imperfect, this synchronized policy response has negative spillovers: a greater quantity of capital flows must be intermediated, which leads to a higher premium on the dollar interest rate, exacerbating the Global Financial Cycle. This bottleneck externality requires further tightening and results in inefficiently low levels of output and employment in EMEs, and generates gains from coordination. On the contrary, discouraging debt issuance in dollars through macroprudential policy has positive spillovers. Its optimal use dampens the Global Financial Cycle and its inefficiencies.