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Financial Globalization and Monetary Transmission

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Listed author(s):
  • Meier, Simone

Abstract

This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford’ (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration.

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Paper provided by CEPREMAP in its series Dynare Working Papers with number 26.

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Length: 42 pages
Date of creation: Jun 2013
Handle: RePEc:cpm:dynare:026
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Keywords: monetary policy transmission; international financial integration;

Other versions of this item:

Find related papers by JEL classification:
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
  • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
  • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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  1. Devereux, Michael B. & Sutherland, Alan, 2008. "Financial globalization and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1363-1375, November.
  2. Ghironi, Fabio & Lee, Jaewoo & Rebucci, Alessandro, 2015. "The valuation channel of external adjustment," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 86-114.
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  4. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  5. Már Gudmundsson, 2008. "Financial globalisation: key trends and implications for the transmission mechanism of monetary policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial market developments and their implications for monetary policy, volume 39, pages 7-29 Bank for International Settlements.
  6. Cwik, Tobias & Müller, Gernot J. & Wolters, Maik H., 2011. "Does trade integration alter monetary policy transmission?," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 545-564, April.
  7. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, vol. 80(2), pages 157-175, March.
  8. Corsetti, Giancarlo & Pesenti, Paolo, 2005. "International dimensions of optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 281-305, March.
  9. Michael Ehrmann & Marcel Fratzscher & Roberto Rigobon, 2011. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(6), pages 948-974, 09.
  10. Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422 Elsevier.
  11. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
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  16. Faust, Jon & Rogers, John H. & Wang, Shing-Yi B. & Wright, Jonathan H., 2007. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1051-1068, May.
  17. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g7084aa4m is not listed on IDEAS
  18. Adjemian, Stéphane & Bastani, Houtan & Juillard, Michel & Karamé, Fréderic & Maih, Junior & Mihoubi, Ferhat & Perendia, George & Pfeifer, Johannes & Ratto, Marco & Villemot, Sébastien, 2011. "Dynare: Reference Manual Version 4," Dynare Working Papers 1, CEPREMAP, revised Jul 2017.
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Cited by:

  1. Georgiadis, Georgios & Mehl, Arnaud, 2016. "Financial globalisation and monetary policy effectiveness," Journal of International Economics, Elsevier, vol. 103(C), pages 200-212.
  2. Bruno Coric & Lena Malesevic Perovic & Vladimir Simic, 2015. "A Cross-Country Analysis of Monetary Policy Effects on Prices," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(5), pages 377-390, October.
  3. Josip Tica & Tomislav Globan & Vladimir Arčabić, 2016. "Monetary Policy Effectiveness, Net Foreign Currency Exposure and Financial Globalisation," EFZG Working Papers Series 1603, Faculty of Economics and Business, University of Zagreb.
  4. Linda S. Goldberg, 2013. "Banking globalization, transmission, and monetary policy autonomy," Staff Reports 640, Federal Reserve Bank of New York.
  5. Bruno Ćorić & Lena Malešević Perović & Vladimir Šimić, 2016. "Openness and the Strength of Monetary Transmission: International Evidence," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 66(4), pages 639-659, December.
  6. Georgiadis, Georgios & Mehl, Arnaud, 2015. "Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness," Globalization and Monetary Policy Institute Working Paper 222, Federal Reserve Bank of Dallas.
  7. Alpaslan AKÇORAOĞLU, 2012. "Yeni Açık Ekonomi Makroiktisat Teorisi ve Para Politikasının Uluslararası Boyutları," Ekonomik Yaklasim, Ekonomik Yaklasim Association, vol. 23(85), pages 57-82.

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