Nominal Stability and Financial Globalization
43 Pages Posted: 27 Jan 2012 Last revised: 16 Feb 2023
Date Written: January 2012
Abstract
Over the one and a half decades prior to the global financial crisis, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This is a highly robust prediction of open economy macro models with endogenous portfolio choice. It holds across many different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Maurice Obstfeld and Alan C. Stockman
-
By Maurice Obstfeld and Kenneth Rogoff
-
Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?
By Varadarajan V. Chari, Patrick J. Kehoe, ...
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
Monetary Policy and Exchange Rate Volatility in a Small Open Economy
By Jordi Galí and Tommaso Monacelli
-
New Directions for Stochastic Open Economy Models
By Maurice Obstfeld and Kenneth Rogoff
-
Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility