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Financial Globalization and Monetary Policy

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Author Info
Michael B. Devereux
Alan Sutherland

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Abstract

What does financial globalization imply for the design of monetary policy? Does the case for price stability change in an environment of large cross country gross asset holdings?. This paper is concerned with the effects of monetary policy under endogenous international portfolio choice and incomplete markets. With endogenous portfolios, monetary policy takes on new importance due to its impact on the distribution of returns on nominal assets. Surprisingly, we find an even stronger case for price stability in this environment. Even without nominal rigidities, price stability has a welfare benefit by enhancing the risk sharing capacity of nominal bond returns.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/279.

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Length: 32 pages
Date of creation: 19 Dec 2007
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Handle: RePEc:imf:imfwpa:07/279

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Keywords: Globalization ; Monetary policy ; Capital flows ; Exchange rate instability ; International capital markets ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, vol. 62(2), pages 359-377, March. [Downloadable!] (restricted)
  2. Devereux, Michael B & Sutherland, Alan, 2007. "Financial Globalization and Monetary Policy," CEPR Discussion Papers 6147, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 265-305. [Downloadable!]
  4. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics. [Downloadable!]
  5. Michael B. Devereux & Alan Sutherland, 2007. "Country Portfolio Dynamics," IMF Working Papers 07/283, International Monetary Fund. [Downloadable!]
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  6. Gianluca Benigno & Pierpaolo Benigno, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 279, European Central Bank. [Downloadable!]
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  7. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 743-764, October. [Downloadable!] (restricted)
  8. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2007. "The Valuation Channel of External Adjustment," NBER Working Papers 12937, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July. [Downloadable!] (restricted)
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  10. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Michael B Devereux & Alan Sutherland, 2007. " Country Portfolio Dynamics," CDMA Conference Paper Series 0706, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  12. Charles Engel & Akito Matsumoto, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund. [Downloadable!]
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  13. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August. [Downloadable!] (restricted)
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  14. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "International Capital Flows, Returns and World Financial Integration," NBER Working Papers 11701, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Cedric Tille & Eric van Wincoop, 2007. "International Capital Flows," Working Papers 122007, Hong Kong Institute for Monetary Research. [Downloadable!]
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  16. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics. [Downloadable!]
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  17. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc. [Downloadable!]
  18. Devereux, Michael B & Saito, Makoto, 2006. "A Portfolio Theory of International Capital Flows," CEPR Discussion Papers 5746, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  19. Michael B. Devereux & Alan Sutherland, 2008. "Country portfolios in open economy macro models," Globalization and Monetary Policy Institute Working Paper 09, Federal Reserve Bank of Dallas. [Downloadable!]
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  20. David Bowman & Brian M. Doyle, 2003. "New Keynesian, open-economy models and their implications for monetary policy," International Finance Discussion Papers 762, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  21. Devereux, Michael B & Sutherland, Alan, 2006. "Solving for Country Portfolios in Open Economy Macro Models," CEPR Discussion Papers 5966, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  22. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July. [Downloadable!] (restricted)
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  23. Bacchetta, Philippe & van Wincoop, Eric, 2000. "Trade in nominal assets and net international capital flows," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 55-72, February. [Downloadable!] (restricted)
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  24. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Enrique Martinez-Garcia, 2008. "Globalization and monetary policy: an introduction," Globalization and Monetary Policy Institute Working Paper 11, Federal Reserve Bank of Dallas. [Downloadable!]
  2. Devereux, Michael B. & Sutherland, Alan, 2008. "Financial globalization and monetary policy," Discussion Paper Series 1: Economic Studies 2008,20, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
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