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Financial globalization and monetary policy

  • Steven B. Kamin
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    This paper reviews the available evidence and previous research on potential effects of financial globalization, that is, the international integration of financial markets. In particular, we address the questions: Has financial globalization materially increased the influence of external developments on domestic monetary conditions? And, has it reduced the influence of central banks over financial and economic conditions in their own country? We find that central banks with floating currencies retain the ability to independently determine short-term interest rates and thus influence broader financial conditions and macroeconomic performance in their economies. However, domestic financial conditions appear to have become more vulnerable to a wide range of external shocks, complicating the task of making appropriate monetary policy decisions. Moreover, the financial crisis has highlighted the importance of cross-border channels for the transmission of liquidity and credit shocks. With financial transactions increasingly being undertaken in vehicle currencies such as dollars and euros, the liquidity provision and the lender-of-last resort functions of many central banks are being challenged. Accordingly, international arrangements for liquidity provision may become increasingly important in the future.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/2010/1002/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/2010/1002/ifdp1002.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1002.

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    Date of creation: 2010
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    Handle: RePEc:fip:fedgif:1002
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    1. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
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    8. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
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    12. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
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    14. Brian M. Doyle & Jon Faust, 2005. "Breaks in the Variability and Comovement of G-7 Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 721-740, November.
    15. Barry Eichengreen & Ashoka Mody & Milan Nedeljkovic & Lucio Sarno, 2012. "How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads," Working papers 21, National Bank of Serbia.
    16. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2008. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," NBER Working Papers 14533, National Bureau of Economic Research, Inc.
    17. Filippo di Mauro & Rasmus Rueffer & Irina Bunda, 2008. "The changing role of the exchange rate in a globalised economy," Occasional Paper Series 94, European Central Bank.
    18. Mark M Spiegel, 2009. "Financial Globalization and Monetary Policy Discipline: A Survey With New Evidence from Financial Remoteness," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 198-221, April.
    19. Harald Badinger, 2008. "Globalization,the Output-Inflation Tradeoff, and Inflation," FIW Working Paper series 010, FIW.
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