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Financial globalisation and monetary policy effectiveness

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  • Georgiadis, Georgios
  • Mehl, Arnaud

Abstract

In theory financial globalisation has an ambiguous effect on monetary policy effectiveness. On the one hand, exposure to global financial cycles dampens the output effect of a tightening in monetary policy in financially integrated economies and thereby reduces monetary policy effectiveness. On the other hand, another salient feature of financial globalisation is that economies have become increasingly net long in foreign currency, which amplifies monetary policy effectiveness: economies experience larger valuation losses and wealth effects on their external balance sheets in response to an exchange rate appreciation when monetary policy is tightened, hence triggering stronger output effects. We quantify empirically the net impact of financial globalisation on monetary policy effectiveness through these two opposing channels. We find that since the 1990s the second channel has dominated so that financial globalisation has amplified monetary policy effectiveness in the typical advanced and emerging market economy. By our estimates, the output effect of a tightening in monetary policy has increased by 25% due to financial globalisation. Our results imply that financial globalisation has modified the transmission of monetary policy by strengthening the importance of the exchange rate channel.

Suggested Citation

  • Georgiadis, Georgios & Mehl, Arnaud, 2016. "Financial globalisation and monetary policy effectiveness," Journal of International Economics, Elsevier, vol. 103(C), pages 200-212.
  • Handle: RePEc:eee:inecon:v:103:y:2016:i:c:p:200-212
    DOI: 10.1016/j.jinteco.2016.10.002
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    Cited by:

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    3. Ca' Zorzi, Michele & Dedola, Luca & Georgiadis, Georgios & Jarociński, Marek & Stracca, Livio & Strasser, Georg, 2020. "Monetary policy and its transmission in a globalised world," Working Paper Series 2407, European Central Bank.
    4. Kerstin Bernoth & Helmut Herwartz, 2019. "Exchange Rates, Foreign Currency Exposure and Sovereign Risk," Discussion Papers of DIW Berlin 1792, DIW Berlin, German Institute for Economic Research.
    5. Jesús Crespo Cuaresma & Gernot Doppelhofer & Martin Feldkircher & Florian Huber, 2019. "Spillovers from US monetary policy: evidence from a time varying parameter global vector auto‐regressive model," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 182(3), pages 831-861, June.
    6. Max Breitenlechner & Georgios Georgiadis & Ben Schumann, 2021. "What goes around comes around: How large are spillbacks from US monetary policy?," Working Papers 2021-05, Faculty of Economics and Statistics, University of Innsbruck.
    7. Auer, Simone, 2019. "Monetary policy shocks and foreign investment income: Evidence from a large Bayesian VAR," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 142-166.
    8. ter Ellen, Saskia & Jansen, Edvard & Midthjell, Nina Larsson, 2020. "ECB Spillovers and domestic monetary policy effectiveness in small open economies," European Economic Review, Elsevier, vol. 121(C).
    9. Haryo Kuncoro, 2020. "Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(2), pages 19-42.
    10. Avdjiev, Stefan & Binder, Stephan & Sousa, Ricardo, 2021. "External debt composition and domestic credit cycles," Journal of International Money and Finance, Elsevier, vol. 115(C).
    11. Gräb, Johannes & Żochowski, Dawid, 2017. "The international bank lending channel of unconventional monetary policy," Working Paper Series 2109, European Central Bank.
    12. Steiner, Andreas & Steinkamp, Sven & Westermann, Frank, 2019. "Exit strategies, capital flight and speculative attacks: Europe's version of the trilemma," European Journal of Political Economy, Elsevier, vol. 59(C), pages 83-96.
    13. Wen Zhang, 2020. "Can trade openness affect the monetary transmission mechanism?," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 341-364, May.
    14. Christian Friedrich & Pierre Guérin & Danilo Leiva-Leon, 2020. "Monetary Policy Independence and the Strength of the Global Financial Cycle," Staff Working Papers 20-25, Bank of Canada.
    15. Bai, Lan & Zhang, Xuhui & Liu, Yuntong & Wang, Qian, 2019. "Economic risk contagion among major economies: New evidence from EPU spillover analysis in time and frequency domains," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 535(C).

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    More about this item

    Keywords

    Financial globalisation; Monetary policy effectiveness; Valuation effects;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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