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The Role of International Financial Integration in Monetary Policy Transmission

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  • Jing Cynthia Wu
  • Yinxi Xie
  • Ji Zhang

Abstract

Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness, and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission.

Suggested Citation

  • Jing Cynthia Wu & Yinxi Xie & Ji Zhang, 2024. "The Role of International Financial Integration in Monetary Policy Transmission," NBER Working Papers 32128, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32128
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    References listed on IDEAS

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    1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    2. Emmanuel Farhi & Ivan Werning, 2012. "Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates," NBER Working Papers 18199, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F30 - International Economics - - International Finance - - - General

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