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Nominal Stability and Financial Globalization

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  • Michael B Devereux

    ()
    (University of British Columbia, CEPR and NBER)

  • Ozge Senay

    ()
    (University of St Andrews)

  • Alan Sutherland

    ()
    (University of St Andrews and CEPR)

Abstract

Over the past four decades, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This appears to be a robust prediction of open economy macro models with endogenous portfolio choice. It holds across different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201309.

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Date of creation: 30 Sep 2013
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Handle: RePEc:san:cdmawp:1309

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Keywords: Nominal stability; Financial Globalization; Country Portfolios;

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References

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Cited by:
  1. Michael B Devereux, 2013. "Inflation and financial globalisation," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 119-128 Bank for International Settlements.

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