Comment on “Real interest rates, imbalances and the curse of regional safe asset providers at the Zero Lower Bound” by Pierre-Olivier Gourinchas and Hélène Rey

Abstract:

This is an important paper: the authors discuss two major issues facing the world economy. They show that the world faces a twenty-first century “Triffin problem”. And they examine the difficulties which will remain with us if, as seems likely, world interest rates stay low for a long period of time. One of the authors–Hélène Rey–is well-known for her writings on what she has called the global financial cycle. Her empirical work on this cycle has overturned much of the conventional wisdom in international macroeconomics. It is helpful, I believe, to think of the two major problems discussed in this paper as arising from the same sets of features of international financial markets which give rise to the global financial cycle, ie arising from the very same features as those which underlie Rey’s earlier work. My main purpose in these comments is to show how, and why, these two bodies of work are so closely related. Nevertheless, I will deliberately conclude with a note of optimism. Using Australia as an example, I will argue that, if a country has a good policy framework, it can largely escape from the global financial cycle and shield itself from the problems described in this paper.