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Financial Globalization and Monetary Policy

  • Michael B. Devereux
  • Alan Sutherland

What does financial globalization imply for the design of monetary policy? Does the case for price stability change in an environment of large cross country gross asset holdings?. This paper is concerned with the effects of monetary policy under endogenous international portfolio choice and incomplete markets. With endogenous portfolios, monetary policy takes on new importance due to its impact on the distribution of returns on nominal assets. Surprisingly, we find an even stronger case for price stability in this environment. Even without nominal rigidities, price stability has a welfare benefit by enhancing the risk sharing capacity of nominal bond returns.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/279.

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Length: 32
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/279
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  1. Alan Sutherland & Michael B. Devereux, 2007. "Country Portfolio Dynamics," IMF Working Papers 07/283, International Monetary Fund.
  2. Michael B. Devereux & Makoto Saito, 2006. "A Portfolio Theory of International Capital Flows," Working Papers 112006, Hong Kong Institute for Monetary Research.
  3. Devereux, Michael B. & Sutherland, Alan, 2008. "Financial globalization and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1363-1375, November.
  4. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
  5. Michael B. Devereux & Alan Sutherland, 2007. "Solving for Country Portfolios in Open Economy Macro Models," Working Papers 162007, Hong Kong Institute for Monetary Research.
  6. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  7. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
  8. Tille, Cédric & van Wincoop, Eric, 2008. "International Capital Flows," CEPR Discussion Papers 6705, C.E.P.R. Discussion Papers.
  9. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 265-305.
  10. Richard W. Fisher, 2006. "Coping with globalization's impact on monetary policy," Speech 82, Federal Reserve Bank of Dallas.
  11. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, vol. 62(2), pages 359-377, March.
  12. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  13. Benigno, Pierpaolo, 2001. "Price Stability with Imperfect Financial Integration," CEPR Discussion Papers 2854, C.E.P.R. Discussion Papers.
  14. Fabio Ghironi & Jaewoo Lee & Alessandro Rebucci, 2006. "The Valuation Channel of External Adjustment," 2006 Meeting Papers 195, Society for Economic Dynamics.
  15. Michael B. Devereux & Alan Sutherland, 2008. "Country Portfolios in Open Economy Macro Models," NBER Working Papers 14372, National Bureau of Economic Research, Inc.
  16. Bacchetta, Philippe & van Wincoop, Eric, 2000. "Trade in nominal assets and net international capital flows," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 55-72, February.
  17. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  18. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
  19. Cedric Tille, 2005. "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations," 2005 Meeting Papers 282, Society for Economic Dynamics.
  20. Michael B Devereux & Alan Sutherland, 2007. " Country Portfolio Dynamics," CDMA Conference Paper Series 0706, Centre for Dynamic Macroeconomic Analysis.
  21. Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University), 2005. "International Capital Flows, Returns and World Financial Integration," Working Papers gueconwpa~05-05-17, Georgetown University, Department of Economics.
  22. Michael B. Devereux & Alan Sutherland, 2007. "Monetary Policy and Portfolio Choice Choice in an Open Economy Macro Model," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 491-499, 04-05.
  23. Kollmann, Robert, 2006. "International Portfolio Equilibrium and the Current Account," CEPR Discussion Papers 5512, C.E.P.R. Discussion Papers.
  24. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
  25. David Bowman & Brian M. Doyle, 2003. "New Keynesian, open-economy models and their implications for monetary policy," International Finance Discussion Papers 762, Board of Governors of the Federal Reserve System (U.S.).
  26. Benigno, Gianluca & Benigno, Pierpaolo, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 0279, European Central Bank.
  27. Helpman, Elhanan & Razin, Assaf, 1978. "A theory of international trade under uncertainty," MPRA Paper 22112, University Library of Munich, Germany.
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