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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. 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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    5. Eichengreen, Barry & Mody, Ashoka & Nedeljkovic, Milan & Sarno, Lucio, 2012. "How the Subprime Crisis went global: Evidence from bank credit default swap spreads," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1299-1318.
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