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Monetary policy strategy in a global environment

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  • Vitale, Giovanni
  • Moutot, Philippe

Abstract

This paper discusses the structural implications of real and financial globalisation, with the aim of drawing lessons for the conduct of monetary policy and, in particular, for the assessment of risks to price stability. The first conclusion of the paper is that globalisation may have played only a limited role in reducing inflation and output volatility in developed economies. Central banks should remain focused on their mandate to preserve price stability. However, the globalisation of financial markets over the last 25 years has had major implications for the conduct of monetary policy. Four elements characterise the new financial landscape: the decline in the "home bias"; the increase in the size of international financial transactions relative to transactions in goods and services; the increase in the number of countries adopting inflation targeting and currency peg monetary regimes; and the transformation of financial market microstructure. The paper argues that in this new environment monetary policy should systematically incorporate financial analysis into its assessment of the risks to price stability. Monetary policy should "lean against the wind" of asset price bubbles that could burst at a high cost and hinder the maintenance of macroeconomic and financial stability. Further, in view of the interlinkages among financial markets worldwide, macro-financial surveillance at the international level needs to be strengthened and monetary policymakers need to cooperate and exchange information on a wider scale and at a deeper level with financial supervisors. Finally, the paper reviews the rationale for a central bank to act (in concert with other central banks) as the ultimate provider of liquidity to financial markets in situations of extreme instability and market malfunctioning. JEL Classification: E44, E58, F33, F42

Suggested Citation

  • Vitale, Giovanni & Moutot, Philippe, 2009. "Monetary policy strategy in a global environment," Occasional Paper Series 106, European Central Bank.
  • Handle: RePEc:ecb:ecbops:2009106
    Note: 361561
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpops/ecbocp106.pdf
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    References listed on IDEAS

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    3. Holm-Hadulla, Fédéric & Kamath, Kishore & Lamo, Ana & Pérez, Javier J. & Schuknecht, Ludger, 2010. "Public wages in the euro area - towards securing stability and competitiveness," Occasional Paper Series 112, European Central Bank.
    4. Jean‐Claude Trichet, 2010. "State of the Union: The Financial Crisis and the ECB's Response between 2007 and 2009," Journal of Common Market Studies, Wiley Blackwell, vol. 48(s1), pages 7-19, September.
    5. Trabandt, Mathias & Slavík, Michal & Checherita-Westphal, Cristina & Maurer, Henri & Catz, Julia & Warmedinger, Thomas & Afonso, António & Leiner-Killinger, Nadine & van Riet, Ad & Valenta, Vilém & Ni, 2010. "Euro area fiscal policies and the crisis," Occasional Paper Series 109, European Central Bank.
    6. Matthieu Bussière & Emilia Pérez‐Barreiro & Roland Straub & Daria Taglioni, 2011. "Protectionist Responses to the Crisis: Global Trends and Implications," The World Economy, Wiley Blackwell, vol. 34, pages 826-852, May.
    7. Martin, Reiner & Gardó, Sándor, 2010. "The impact of the global economic and financial crisis on central, eastern and south-eastern Europe: A stock-taking exercise," Occasional Paper Series 114, European Central Bank.
    8. Donoval, Milan & Gautier, Erwan & Nuño, Galo & Nakov, Anton & Jiménez, Noelia & de los Llanos Matea, María & Estrada, Ángel & Zioutou, Pinelopi & Bragoudakis, Zacharias & Weymes, Laura & O'Brien, Derr, 2010. "Energy markets and the euro area macroeconomy," Occasional Paper Series 113, European Central Bank.
    9. Hubrich, Kirstin & Karlsson, Tohmas, 2010. "Trade consistency in the context of the Eurosystem projection exercises - an overview," Occasional Paper Series 108, European Central Bank.
    10. Sturm, Michael & Sauter, Nicolas, 2010. "The impact of the global financial turmoil and recession on Mediterranean countries' economies," Occasional Paper Series 118, European Central Bank.
    11. Jeroen Hessel & Jolanda Peeters, 2011. "Housing bubbles, the leverage cycle and the role of central banking," DNB Occasional Studies 905, Netherlands Central Bank, Research Department.
    12. di Mauro, Filippo & Forster, Katrin & Lima, Ana, 2010. "The global downturn and its impact on euro area exports and competitiveness," Occasional Paper Series 119, European Central Bank.
    13. Cheun, Samuel & von Köppen-Mertes, Isabel & Weller, Benedict, 2009. "The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil," Occasional Paper Series 107, European Central Bank.
    14. Bodea, Cristina & Huemer, Stefan, 2010. "Dancing together at arm's length? - the interaction of central banks with governments in the G7," Occasional Paper Series 120, European Central Bank.
    15. Hess, Patrick, 2010. "Securities clearing and settlement in China: markets, infrastructures and policy-making," Occasional Paper Series 116, European Central Bank.
    16. Francis, Bill B. & Hunter, Delroy M. & Kelly, Patrick J., 2020. "Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 386-411.
    17. Renata Karkowska, 2012. "The economic costs of economic risk in the financial market (Koszty ekonomiczne ryzyka systemowego na rynku finansowym)," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 10(39), pages 33-53.
    18. Beirne, John & Tapking, Jens & Sahel, Benjamin & Sušec, Matjaž & Monar, Fernando & Manganelli, Simone & Grothe, Magdalena & Ejsing, Jacob & Dalitz, Lars & Vong, Tana, 2011. "The impact of the Eurosystem's covered bond purchase programme on the primary and secondary markets," Occasional Paper Series 122, European Central Bank.
    19. Simeng Li & Gang Chen, 2020. "Contemporary strategies for enhancing nitrogen retention and mitigating nitrous oxide emission in agricultural soils: present and future," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 22(4), pages 2703-2741, April.

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    More about this item

    Keywords

    Asset Prices; financial markets; globalisation; monetary policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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