Nominal Stability and Financial Globalization

Authors

  • MICHAEL B. DEVEREUX,

  • OZGE SENAY,

  • ALAN SUTHERLAND


  • We are grateful for comments on an earlier version of this paper from two anonymous referees, Philippe Bacchetta, Morten Ravn, Philip Lane, and participants at the CEPR MGI conference at LBS, March 2011. This research is supported by ESRC Award Number ES/I024174/1.

Abstract

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.

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