Chapter

Globalization and Monetary Control

Michael Woodford

in International Dimensions of Monetary Policy

Published by University of Chicago Press

Published in print March 2010 | ISBN: 9780226278865
Published online February 2013 | e-ISBN: 9780226278872 | DOI: http://dx.doi.org/10.7208/chicago/9780226278872.003.0002
Globalization and Monetary Control

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This chapter gives an overview of economic theory in terms of globalization and monetary control. The three different channels through which globalization is often argued to limit the effectiveness of national monetary policies using a simple two-country version of the new-Keynesian model are studied. It is found that highly integrated financial markets may hamper a central bank's ability to influence real interest rates and hence, aggregate demand. Even in the limiting case of an economy of negligible size, with access to complete international financial markets and an arbitrarily large share of foreign goods in the consumption basket of its residents, the analysis shows how the central bank can still influence decisively domestic economic outcomes and, in particular, can still hold a firm grip on domestic inflation.

Keywords: economic theory; globalization; monetary policies; inflation; financial markets

Chapter.  30252 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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