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Nominal Stability and Financial Globalization

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  • Devereux, Michael B
  • Senay, Ozge
  • Sutherland, Alan

Abstract

Over the one and a half decades prior to the global financial crisis, 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 is a highly robust prediction of open economy macro models with endogenous portfolio choice. It holds across many 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.

Suggested Citation

  • Devereux, Michael B & Senay, Ozge & Sutherland, Alan, 2012. "Nominal Stability and Financial Globalization," CEPR Discussion Papers 8830, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8830
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    Citations

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    Cited by:

    1. Senay, Ozge & Sutherland, Alan, 2019. "Optimal monetary policy, exchange rate misalignments and incomplete financial markets," Journal of International Economics, Elsevier, vol. 117(C), pages 196-208.
    2. Ning Zhang, 2018. "Asset home bias in debtor and creditor countries," Working Papers 2019-11, Business School - Economics, University of Glasgow.
    3. Ning Zhang, 2017. "Two-way capital flows: A risk-sharing approach," Working Papers 2019_09, Business School - Economics, University of Glasgow.
    4. Ning Zhang, 2019. "Asset home bias in debtor and creditor countries," 2019 Meeting Papers 850, Society for Economic Dynamics.
    5. Michael B. Devereux & Ozge Senay & Alan Sutherland, 2014. "Nominal Stability and Financial Globalization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(5), pages 921-959, August.
    6. Devereux, Michael B. & Yetman, James, 2014. "Globalisation, pass-through and the optimal policy response to exchange rates," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 104-128.
    7. Bianca De Paoli & Hande Küçük, 2015. "News shocks, monetary policy, and foreign currency positions," Staff Reports 750, Federal Reserve Bank of New York.
    8. Zhang, Ning, 2019. "Country portfolios under global imbalances," European Economic Review, Elsevier, vol. 119(C), pages 302-317.
    9. 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.
    10. Georgios Georgiadis & Arnaud Mehl, 2015. "Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness," Globalization Institute Working Papers 222, Federal Reserve Bank of Dallas.
    11. Ning Zhang, 2017. "Two-way capital flows: A risk-sharing approach," Working Papers 2019-09, Business School - Economics, University of Glasgow.
    12. Georgiadis, Georgios & Mehl, Arnaud, 2016. "Financial globalisation and monetary policy effectiveness," Journal of International Economics, Elsevier, vol. 103(C), pages 200-212.
    13. Ning Zhang, 2018. "Asset home bias in debtor and creditor countries," Working Papers 2019_11, Business School - Economics, University of Glasgow.

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    More about this item

    Keywords

    Country Portfolios; Financial Globalization; Nominal stability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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