Good Policies or Good Luck? New Insights on Globalization and the International Monetary Policy Transmission Mechanism

Enrique Martínez García ()

No 321, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: The open-economy dimension is central to the discussion of the trade-offs that monetary policy faces in an increasingly integrated world. I investigate the monetary policy transmission mechanism in a two-country workhorse New Keynesian model where policy is set according to Taylor (1993) rules. I find that a common monetary policy isolates the effects of trade openness on the cross-country dispersion, and that the establishment of a currency union as a means of deepening economic integration may lead to indeterminacy. I argue that the common (coordinated) monetary policy equilibrium is the relevant benchmark for policy analysis showing that in that case open economies tend to experience lower macro volatility, a flatter Phillips curve, and more accentuated trade-offs between inflation and slack. Moreover, I show that the trade elasticity often magnifies the effects of trade integration (globalization) beyond what conventional measures of trade openness would imply. I also discuss how other features such as the impact of a stronger anti-inflation bias, technological diffusion across countries, and the sensitivity of labor supply to real wages influence the quantitative effects of policy and openness in this context. Finally, I conclude that the theoretical predictions of the workhorse open-economy New Keynesian model are largely consistent with the stylized facts of the globalization era started in the 1960s and the Great Moderation period that followed.

JEL-codes: C11 C13 F41 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2017-07-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Journal Article: Good Policies or Good Luck? New Insights on Globalization and the International Monetary Policy Transmission Mechanism (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:321

DOI: 10.24149/gwp321

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