Nominal Stability and Financial Globalization

Alan Sutherland (), Ozge Senay and Michael Devereux

No 8830, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Country portfolios; Financial globalization; Nominal stability (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Nominal Stability and Financial Globalization (2014)
Working Paper: Nominal Stability and Financial Globalization (2013)
Working Paper: Nominal Stability and Financial Globalization (2012)
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