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Financial globalization and monetary policy discipline

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  • Mark M. Spiegel

Abstract

The literature appears to have reached a consensus that financial globalization has had a "disciplining effect" on monetary policy, as it has reduced the returns from--and hence the temptation for--using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. In this paper, I introduce a new instrument, financial remoteness, as a plausibly exogenous instrument for financial openness. I examine the relationship between financial globalization and median inflation levels over an 11 year cross-section from 1994 through 2004, as well as a panel of 5-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences.

Suggested Citation

  • Mark M. Spiegel, 2008. "Financial globalization and monetary policy discipline," Working Paper Series 2008-10, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2008-10
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    References listed on IDEAS

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    Cited by:

    1. Dilip K. Das, 2010. "Financial globalization: a macroeconomic angle," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 2(4), pages 307-325, November.
    2. L. Arturo Bernal Ponce & Humberto Valencia Herrera, 2010. "Relación entre inflación y volatilidad de derivados financieros: el caso de México," Revista de Administración, Finanzas y Economía (Journal of Management, Finance and Economics), Tecnológico de Monterrey, Campus Ciudad de México, vol. 4(1), pages 18-28.
    3. L. Arturo Bernal Ponce & Francisco Venegas Martínez, 2011. "Impacto de los productos derivados los objetivos de política monetaria: un modelo de equilibrio general," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 26(2), pages 187-216.

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    Keywords

    Monetary policy ; Inflation (Finance) ; Globalization;

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