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Nominal Stability and Financial Globalization
Author(s) -
DEVEREUX MICHAEL B.,
SENAY OZGE,
SUTHERLAND ALAN
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12127
Subject(s) - economics , portfolio , inflation (cosmology) , globalization , financial globalization , asset (computer security) , economic stability , stability (learning theory) , monetary economics , macroeconomics , econometrics , financial economics , market economy , physics , computer security , machine learning , theoretical physics , computer science
Over the past four decades, there has been a substantial increase in financial globalization , that is, rapid growth in gross external portfolio positions. There has also been a substantial fall in the variability of inflation. Many economists have conjectured that financial globalization contributed to the improved inflation performance. This paper explores the causal link running in the opposite direction. Using an open economy model with endogenous portfolio choice, it is shown that a monetary rule that reduces inflation variability tends to increase the size of gross external asset positions. This result appears to be robust across different modeling specifications.