Princeton, NJ: Princeton University Press Rey, H. (2013), “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, Paper for a symposium sponsored by the Federal Reserve Bank of Kansas City, at Jackson Hole, Wyoming, on August 21-23, 2013 Schularick, M and Taylor, A (2012), “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008”, American Economic Review 102(2): 1029-1061  16  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  16  Thing Global, Act Local  Speech given by Minouche Shafik, Deputy Governor for Markets and Banking On the 24th October 2016 At the joint Bank of England, IMF & Hong Kong Monetary Authority conference on  Monetary, Financial and Prudential Policy Interactions in the Post-Crisis World, Hong Kong  Chart 1 Greater capital openness has facilitated an increase in gross external liabilities of advanced and emerging economies  Source: Hoggarth et al (forthcoming), IMF International Financial Statistics, IMF World Economic Outlook and Bank of England calculations. Chart 2 Correlation of credit growth across countries has increased in recent decades  Source: Cesa-Bianchi et al. (forthcoming). Note: Bars show average correlation of each country’s domestic credit growth with the average of domestic credit growth in the rest of the world. Chart 3 Reciprocity allows countries to reduce the probability of a crisis by more than if they were acting alone  Source: Aikman et al (forthcoming) and Bank of England calculations.
The first is that although cross-border bank flows have plateaued, in many other ways the global financial system is as interconnected as ever, and that we need to be mindful of spillovers from elsewhere when setting policy. The second is that by acting in their domestic best interest, policymakers can often improve the global outcome. In short, we need to think globally, act locally. The need to think globally Let me start with some context. Evidence of a ‘global financial cycle’, which drives co-movements in asset prices, and pro-cyclical gross capital flows, has been well documented, for example by Helene Rey (2013) and by my colleague Kristin Forbes (2016). Global financial markets have become more correlated and common shocks play an important role. According to the IMF, around three-quarters of equity and foreign exchange returns in both advanced and emerging market economies are now attributable to international 3  factors. We have also observed an increase in the co-movement of domestic credit growth across countries over the last two decades (Chart 2). Elevated domestic credit growth has been found to be the best single predictor of banking crises (Drehmann et al (2011), Schularick and Taylor, 2012). However, banking crises come “in waves” (Reinhart and Rogoff, 2009; Laeven and Valencia, 2013), which, together with signs of greater correlation of credit growth across countries, suggests a role for external determinants and/or direct contagion.