Wednesday, September 12, 2007

Globalization and monetary control (fg)

We already discussed extensively the impact of globalization on domestic inflation in this blog (here, here or here). A main finding is that domestic inflation dynamics are still under control of national monetary policy and thus, it is difficult to think of plausible economic transmission mechanims through which globalization should impair in any way the ability of central banks to control domestic inflation.
In a recent paper Michael Woodford modifies the New Keynesian model into a two-country case and analyzes the consequences of financial integration, goods market and factor market integration. He can show that the national power of monetary policy to affect inflation holds. Global liquidity, syncronisation of global real interest rates and global slack do not change this insight either.