Advanced Search
MyIDEAS: Login to save this paper or follow this series

Nominal Stability and Financial Globalization

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.st-andrews.ac.uk/economics/repecfiles/4/1311.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 201311.

as in new window
Length:
Date of creation: 30 Sep 2013
Date of revision:
Handle: RePEc:san:wpecon:1311

Contact details of provider:
Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
Phone: 01334 462420
Fax: 01334 462444
Web page: http://www.st-andrews.ac.uk/economics/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Nominal stability; Financial Globalization; Country Portfolios;

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Fabrizio Perri & Jonathan Heathcote, 2007. "The International Diversification Puzzle Is Not as Bad as You Think," Working Papers, University of Minnesota, Department of Economics 2007-3, University of Minnesota, Department of Economics, revised 08 Oct 2007.
  2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
  3. Devereux, Michael B & Sutherland, Alan, 2007. "Country Portfolio Dynamics," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6208, C.E.P.R. Discussion Papers.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  5. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  6. De Paoli, Bianca & Küçük-Tuğer, Hande & Søndergaard, Jens, 2010. "Monetary policy rules and foreign currency positions," Bank of England working papers 403, Bank of England.
  7. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  8. Gianluca Benigno & Christoph Theonissen, 2006. "Consumption and real exchange rates with incomplete markets and non-traded goods," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3758, London School of Economics and Political Science, LSE Library.
  9. Nigel Pain & Isabell Koske & Marte Sollie, 2006. "Globalisation and Inflation in the OECD Economies," OECD Economics Department Working Papers 524, OECD Publishing.
  10. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6112, C.E.P.R. Discussion Papers.
  11. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  12. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  13. 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, Trinity College Dublin, Department of Economics 20012, Trinity College Dublin, Department of Economics.
  14. Devereux, Michael B & Sutherland, Alan, 2007. "Financial Globalization and Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6147, C.E.P.R. Discussion Papers.
  15. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2008. "International Risk Sharing and the Transmission of Productivity Shocks," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 443-473.
  16. Lane, Philip R. & Shambaugh, Jay C, 2008. "The Long or Short of it: Determinants of Foreign Currency Exposure in External Balance Sheets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6887, C.E.P.R. Discussion Papers.
  17. Smets, Frank & Wouters, Rafael, 2004. "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4750, C.E.P.R. Discussion Papers.
  18. James H. Stock & Mark W. Watson, 2003. "Understanding Changes in International Business Cycle Dynamics," NBER Working Papers 9859, National Bureau of Economic Research, Inc.
  19. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(3), pages 601-627, April.
  20. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2004. "Competition, Globalization and the Decline of Inflation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4695, C.E.P.R. Discussion Papers.
  21. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
  22. Kizys, Renatas & Pierdzioch, Christian, 2009. "Changes in the international comovement of stock returns and asymmetric macroeconomic shocks," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 19(2), pages 289-305, April.
  23. Akito Matsumoto & Charles Engel, 2009. "The International Diversification Puzzle when Goods Prices Are Sticky," IMF Working Papers 09/12, International Monetary Fund.
  24. Charles Engel, 2009. "Currency Misalignments and Optimal Monetary Policy: A Re-examination," RBA Research Discussion Papers, Reserve Bank of Australia rdp2009-01, Reserve Bank of Australia.
  25. Pierpaolo Benigno & Salvatore Nistic�, 2012. "International Portfolio Allocation under Model Uncertainty," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 144-89, January.
  26. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(5), pages 1123-1175, 09.
  27. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1750, C.E.P.R. Discussion Papers.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

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.
  2. Michael B Devereux & James Yetman, 2014. "Globalisation, pass-through and the optimal policy response to exchange rates," BIS Working Papers 450, Bank for International Settlements.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:san:wpecon:1311. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bram Boskamp).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.