Drivers of the global financial cycle

Building on literature focused on the role of U.S. monetary policy in driving the global financial cycle, we quantify the relative importance of different shocks in an estimation framework that simultaneously identifies multiple shocks without timing or sign restrictions. Our analysis reveals significant roles for (i) U.S. corporate bond spreads, particularly the excess bond premium component, (ii) U.S. bank leverage, and (iii) the U.S. term premium. We additionally document a feedback loop that leads to significant amplification effects: widening U.S. corporate bond spreads trigger broad declines in global asset prices, which in turn lead to further tightening of U.S. spreads.