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Globalization, macroeconomic performance, and monetary policy

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  • Frederic S. Mishkin

Abstract

The paper argues that many of the exaggerated claims that globalization has been an important factor in lowering inflation in recent years just do not hold up. Globalization does, however, have the potential to be stabilizing for individual economies and has been a key factor in promoting economic growth. The paper then examines four questions about the impact of globalization on the monetary transmission mechanism and arrives at the following answers: (1) Has globalization led to a decline in the sensitivity of inflation to domestic output gaps and thus to domestic monetary policy? No. (2) Are foreign output gaps playing a more prominent role in the domestic inflation process, so that domestic monetary policy has more difficulty stabilizing inflation? No. (3) Can domestic monetary policy still control domestic interest rates and so stabilize both inflation and output? Yes. (4) Are there other ways, besides possible influences on inflation and interest rates, in which globalization may have affected the transmission mechanism of monetary policy? Yes.

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Bibliographic Info

Article provided by Board of Governors of the Federal Reserve System (U.S.) in its journal Proceedings.

Volume (Year): (2008)
Issue (Month): ()
Pages:

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Handle: RePEc:fip:fedgpr:y:2008:x:1

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Keywords: Monetary policy ; Macroeconomics ; Globalization;

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References

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  1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  2. Erceg, Christopher & Gust, Christopher & López-Salido, J David, 2007. "The Transmission of Domestic Shocks in Open Economies," CEPR Discussion Papers 6574, C.E.P.R. Discussion Papers.
  3. Francis E. Warnock & Veronica Cacdac Warnock, 2006. "International Capital Flows and U.S. Interest Rates," NBER Working Papers 12560, National Bureau of Economic Research, Inc.
  4. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD Publishing.
  5. Jane Ihrig & Steven B. Kamin & Deborah Lindner & Jaime Marquez, 2007. "Some simple tests of the globalization and inflation hypothesis," International Finance Discussion Papers 891, Board of Governors of the Federal Reserve System (U.S.).
  6. Luca Guerrieri & Christopher Gust & J. David L�pez-Salido, 2010. "International Competition and Inflation: A New Keynesian Perspective," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 247-80, October.
  7. Mark A. Wynne & Erasmus K. Kersting, 2007. "Openness and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Apr.
  8. Ehrmann, Michael & Fratzscher, Marcel & Rigobon, Roberto, 2005. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Working Paper Series 0452, European Central Bank.
  9. Kenneth Rogoff, 2003. "Globalization and global disinflation," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 45-78.
  10. Paul Bergin & Robert Feenstra, 2006. "Outsourcing and Volatility," Working Papers 628, University of California, Davis, Department of Economics.
  11. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
  12. Roberts, John M, 2006. "Monetary Policy and Inflation Dynamics," MPRA Paper 812, University Library of Munich, Germany.
  13. Faust, Jon & Rogers, John H. & Wang, Shing-Yi B. & Wright, Jonathan H., 2007. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1051-1068, May.
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