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Is Globalization Reducing the Ability of Central Banks to Control Inflation? A Literature Review with an Application to the Euro Area

Author

Listed:
  • Fiedler Salomon
  • Jannsen Nils

    ()

  • Reitz Stefan
  • Wolters Maik

    (Kiel Institute for the World Economy, Kiellinie 66, 24105 Kiel, Germany)

Abstract

Globalization influences inflation and the transmission channels of monetary policy in various ways. The effects of globalization on the ability of monetary policy to control inflation have been discussed intensively. However, in the light of recent experiences following the global financial crisis with extended periods of disinflation in many advanced economies, the question whether the ability of monetary policy to control inflation has suffered significantly from increasing globalization has received new relevance. Based on a review of the literature, this paper discusses whether globalization is reducing the ability of central banks to control inflation and draws conclusion for the current situation in the euro area. We find that globalization has made it more complicated for central banks to ensure price stability and that it has tended to reduce the ability of monetary policy to control inflation in the short- to medium-run. However, in principle the ECB is still able to control inflation but may have to tolerate deviations from its inflation target for somewhat longer periods.

Suggested Citation

  • Fiedler Salomon & Jannsen Nils & Reitz Stefan & Wolters Maik, 2016. "Is Globalization Reducing the Ability of Central Banks to Control Inflation? A Literature Review with an Application to the Euro Area," Review of Economics, De Gruyter, vol. 67(3), pages 231-253, December.
  • Handle: RePEc:lus:reveco:v:67:y:2016:i:3:p:231-253:n:3
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    monetary policy; globalization;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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