Nominal Stability and Financial Globalization

Michael Devereux, Ozge Senay and Alan Sutherland ()

No 17796, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F3 F33 F4 F41 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Michael B. Devereux & Ozge Senay & Alan Sutherland, 2014. "Nominal Stability and Financial Globalization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(5), pages 921-959, 08.

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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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