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Economics Department Community
> Economics Discussion Papers
Globalization and monetary control
| Author(s): | Woodford, Michael |
| Title: | Globalization and monetary control |
| Issue Date: | 2007-Jul-31 |
| Series no.: | Discussion Paper 0607-17 |
| Bookmark as: | http://hdl.handle.net/10022/AC:P:431 |
| Abstract: | It has recently become popular to argue that globalization has had or will
soon have dramatic consequences for the nature of the monetary transmission
mechanism, and it is sometimes suggested that this could threaten the ability
of national central banks to control inflation within their borders, at least in
the absence of coordination of policy with other central banks. In this paper,
I consider three possible mechanisms through which it might be feared that
globalization can undermine the ability of monetary policy to control inflation:
by making liquidity premia a function of "global liquidity" rather than the
supply of liquidity by a national central bank alone; by making real interest
rates dependent on the global balance between saving and investment rather
than the balance in one country alone; or by making inflationary pressure a
function of "global slack" rather than a domestic output gap alone. These three
fears relate to potential changes in the form of the three structural equations of
a basic model of the monetary transmission mechanism: the LM equation, the
IS equation, and the AS equation respectively. I review the consequences of
global integration of financial markets, final goods markets, and factor markets
for the form of each of these parts of the monetary transmission mechanism,
and find that globalization, even of a much more thorough sort than has yet
occurred, is unlikely to weaken the ability of national central banks to control
the dynamics of inflation. |
| Collection(s): | Economics Discussion Papers
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