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Globalization and Monetary Control

Woodford, Michael

Taken from pages 13-14-- 'Concern has recently been expressed in a variety of quarters that the problems facing central banks may be substantially complicated by the increasing globalization of goods markets, factor markets, and fi nancial markets in recent years. Some of the more alarmist views suggest that the very ability of national central banks to materially influence the dynamics of inflation in their countries through monetary policy actions may be undermined by globalization. According to such accounts, the recently observed low and stable inflation in many parts of the world should be attributed mainly to favorable (and likely transient) global developments rather than to the sound policies of central banks in those parts of the world; and rather than congratulating themselves on how skilled they have become at the conduct of monetary stabilization policy, central bankers should instead live in dread of the day when the implacable global market forces instead turn against them, making a return of inflation all but inevitable.
In this chapter I consider a variety of reasons why globalization might be expected to weaken the control of national central banks over inflation within their borders. These correspond to three distinct aspects of the transmission mechanism for monetary policy: the link between central- bank actions and overnight nominal interest rates (in a conventional 3- equation model, the extent to which it is possible for central bank policy to shift the “LM curve”); the link between real interest rates and the balance between saving and investment in the economy (described by the “IS curve”); and the link between variations in domestic real activity and inflation (described by the “AS curve”).'


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International Dimensions of Monetary Policy
University of Chicago Press

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November 25, 2013