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Globalisation and Monetary Policy

  • Paul Cavelaars
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    This paper studies the implications of globalisation for the effectiveness of monetary policy in large open economies, such as the euro area and the United States. The analysis allows for imperfect competition and an endogenous home bias in consumption. I find that globalisation (a reduction in the costs of international trade) causes a monetary expansion to have a larger (smaller) e�ect on prices (output). To the extent that globalisation also induces stronger competition in the goods market, I find that its impact on the incentive for activist monetary policy is ambiguous. Finally, globalisation reduces the beggary-thy-neighbour effects of monetary policy.

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    File URL: http://www.dnb.nl/binaries/Working%20Paper%2048_tcm46-146705.pdf
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    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 048.

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    Date of creation: Aug 2005
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    Handle: RePEc:dnb:dnbwpp:048
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    Web page: http://www.dnb.nl/en/
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    1. Maria Cristina Terra, 1995. "Openess and inflation: a new assessment," Textos para discussão 339, Department of Economics PUC-Rio (Brazil).
    2. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    3. Keith Head & Thierry Mayer, 2000. "Non-Europe: The magnitude and causes of market fragmentation in the EU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 284-314, June.
    4. Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-79, April.
    5. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June.
    6. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
    7. William Gruben & Darryl Mcleod, 2004. "The openness-inflation puzzle revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 11(8), pages 465-468.
    8. Karras, Georgios, 1999. "Openness and the effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 13-26, January.
    9. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, vol. 50(2), pages 421-447, April.
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