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Financial globalization and monetary policy

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  • Devereux, Michael B.
  • Sutherland, Alan

Abstract

Recent data show substantial increases in the size of gross external asset and liability positions. The implications of these developments for optimal conduct of monetary policy are analyzed in a standard open economy model which is augmented to allow for endogenous portfolio choice. The model shows that monetary policy takes on new importance due to its impact on nominal asset returns. Nevertheless, the case for price stability as an optimal monetary rule remains. In fact, it is reinforced. Even without nominal price rigidities, price stability is optimal because it enhances the risk sharing properties of nominal bonds. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2008,20.

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Date of creation: 2008
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Handle: RePEc:zbw:bubdp1:7445

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Keywords: Portfolio Choice; International Risk Sharing; Exchange Rate;

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  1. International Risk Sharing: Through Equity Diversification or Exchange Rate Hedging?
    by Martin Berka in NEP-OPM blog on 2009-10-28 01:07:50
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