The global reach of the Fed, and why it is time to discard Mundell-Fleming

Miranda-Agrippino and Rey have an important new paper out on global transmission of money shocks.  I find the abstract poorly presented, but here are the key sentences from the body of the paper:

…US monetary policy has a significant effect on the leverage of US and European investors (particularly continental European and UK banks who have large capital market operations and are classified as systemically important banks), on cross-border credit flows and on credit growth worldwide…Our results are not driven by the crisis period…

I am not sure if I should feel better or worse about all that, in the meantime beware of purely domestic monetary policy arguments for a particular policy.

Note also that the Mundell-Fleming model is looking rather weak these days.  Not long ago Olivier Blanchard and co-authors told us that capital inflows are expansionary, now there is more work from Cambridge telling us that floating exchange rates do not insulate a country from the monetary policy of its neighbors.

Isn’t it time to conclude that the Mundell-Fleming is mostly wrong?  You know wrong, as in…not correct.  Incorrect, in fact.


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