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Banking globalization, transmission, and monetary policy autonomy

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  • Linda S. Goldberg
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    Abstract

    International financial linkages, particularly through global bank flows, generate important questions about the consequences for economic and financial stability, including the ability of countries to conduct autonomous monetary policy. I address the monetary autonomy issue in the context of the international policy trilemma: Countries seek three typically desirable but jointly unattainable objectives—stable exchange rates, free international capital mobility, and monetary policy autonomy oriented toward, and effective at, achieving domestic goals. I argue that global banking entails some features that are distinct from the broad issues of capital market openness captured in existing studies. In principle, if global banks with affiliates in foreign markets can reduce frictions in international capital flows, then the macroeconomic policy trilemma could bind tighter and interest rates will exhibit more co-movement across countries. However, if the information content and stickiness of the claims and services provided are enhanced relative to a benchmark alternative, then global banks can weaken the trilemma rather than enhance it. The result is a prediction of heterogeneous effects on monetary autonomy, tied to the business models of the global banks and whether countries are investment or funding locations for those banks. Empirical tests of the trilemma support this view that global bank effects are heterogeneous and that the primary drivers of monetary autonomy are exchange rate regimes.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 640.

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    Date of creation: 2013
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    Handle: RePEc:fip:fednsr:640

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    Keywords: Monetary policy ; International economic integration ; Foreign exchange rates ; Capital movements ; Banks and banking; International ; Flow of funds;

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    1. Meier, Simone, 2013. "Financial Globalization and Monetary Transmission," Dynare Working Papers 26, CEPREMAP.
    2. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
    3. Friederike Niepmann, 2013. "Banking across Borders," CESifo Working Paper Series 4120, CESifo Group Munich.
    4. Linda S. Goldberg & Christian Grisse, 2013. "Time variation in asset price responses to macro announcements," Staff Reports 626, Federal Reserve Bank of New York.
    5. Degryse, H.A. & Ongena, S., 2003. "Distance, Lending Relationships, and Competition," Discussion Paper 2003-123, Tilburg University, Center for Economic Research.
    6. Julian di Giovanni & Jay C. Shambaugh, 2006. "The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime," IMF Working Papers 06/37, International Monetary Fund.
    7. Nicola Cetorelli & Linda S. Goldberg, 2011. "Liquidity management of U.S. global banks: Internal capital markets in the great recession," NBER Working Papers 17355, National Bureau of Economic Research, Inc.
    8. Claudia M. Buch & Cathérine T. Koch & Michael Koetter, 2013. "Do Banks Benefit from Internationalization? Revisiting the Market Power--Risk Nexus," Review of Finance, European Finance Association, vol. 17(4), pages 1401-1435.
    9. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," NBER Working Papers 16226, National Bureau of Economic Research, Inc.
    10. Tamim Bayoumi & Andrew Swiston, 2007. "Foreign Entanglements: Estimating the Source and Size of Spillovers Across Industrial Countries," IMF Working Papers 07/182, International Monetary Fund.
    11. Canova, Fabio, 2003. "The Transmission of US Shocks to Latin America," CEPR Discussion Papers 3963, C.E.P.R. Discussion Papers.
    12. Nicola Cetorelli & Linda S Goldberg, 2011. "Global Banks and International Shock Transmission: Evidence from the Crisis," IMF Economic Review, Palgrave Macmillan, vol. 59(1), pages 41-76, April.
    13. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2007. "How banks go abroad: Branches or subsidiaries?," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1669-1692, June.
    14. Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M, 2004. "The Trilemma in History: Trade-offs Among Exchange Rates, Monetary Policies and Capital Mobility," CEPR Discussion Papers 4352, C.E.P.R. Discussion Papers.
    15. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
    16. Joshua Hausman & Jon Wongswan, 2006. "Global asset prices and FOMC announcements," International Finance Discussion Papers 886, Board of Governors of the Federal Reserve System (U.S.).
    17. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    18. Nicola Cetorelli & Linda S. Goldberg, 2012. "Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession," NBER Working Papers 17873, National Bureau of Economic Research, Inc.
    19. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers 784, Board of Governors of the Federal Reserve System (U.S.).
    20. Kristin J. Forbes & Menzie D. Chinn, 2004. "A Decomposition of Global Linkages in Financial Markets Over Time," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 705-722, August.
    21. Maurice Obstfeld, 2012. "Does the Current Account Still Matter?," NBER Working Papers 17877, National Bureau of Economic Research, Inc.
    22. Linda S. Goldberg & Michael W. Klein, 2011. "Evolving Perceptions of Central Bank Credibility: The European Central Bank Experience," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 153 - 182.
    23. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2003. "Bank Concentration and Crises," NBER Working Papers 9921, National Bureau of Economic Research, Inc.
    24. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
    25. Ralph De Haas & Neeltje Van Horen, 2012. "International shock transmission after the Lehman Brothers collapse – evidence from syndicated lending," Working Papers 142, European Bank for Reconstruction and Development, Office of the Chief Economist.
    26. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    27. Tobias Adrian & Paolo Colla & Hyun Song Shin, 2011. "Which financial frictions? Parsing the evidence from the financial crisis of 2007-09," Staff Reports 528, Federal Reserve Bank of New York.
    28. Mark M Spiegel, 2009. "Financial Globalization and Monetary Policy Discipline: A Survey With New Evidence from Financial Remoteness," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 198-221, April.
    29. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2010. "The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 615-641, June.
    30. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
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