Financial globalization and monetary policy

Michael B. Devereux () and Alan Sutherland ()

No 2008,20, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre

Abstract: Recent data show substantial increases in the size of gross external asset and liability positions. The implications of these developments for optimal conduct of monetary policy are analyzed in a standard open economy model which is augmented to allow for endogenous portfolio choice. The model shows that monetary policy takes on new importance due to its impact on nominal asset returns. Nevertheless, the case for price stability as an optimal monetary rule remains. In fact, it is reinforced. Even without nominal price rigidities, price stability is optimal because it enhances the risk sharing properties of nominal bonds.

Keywords: Portfolio Choice; International Risk Sharing; Exchange Rate (search for similar items in EconPapers)
JEL-codes: F41 E58 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Date: 2008
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Related works:
Working Paper: Financial Globalization and Monetary Policy (2007)
Working Paper: Financial Globalization and Monetary Policy (2007)
Journal Article: Financial globalization and monetary policy (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:zbw:bubdp1:7445

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