A paradox reminiscent of Alan Greenspan’s “conundrum” in the 2000s is playing out these days as global financial conditions have become easier ever since the U.S. Federal Reserve began its gradual but persistent tightening of monetary policy two years ago, according to the Bank for International Settlements (BIS).
“Can a tightening be considered effective if financial conditions unambiguously ease?,” asks Claudio Borio, head of BIS’ monetary and economic department, as the world’s oldest international financial institution releases its December quarterly review.
In addition to a revamped and more timely commentary on developments in global banking and financial flows, the December review includes an analysis of credit risk transfers in which the authors document how global banks shift credit risks out of financial centers and riskier emerging market economies and into advanced economies.
The review also includes two special features that shed light on how the stock of debt affects macroeconomic developments and financial stability. This helps show how monetary policy normalization will affect economic activity.