Financial Globalization and Monetary Transmission

This paper analyzes the way in which international …nancial integration a¤ects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford's (2010) analysis to a model with a richer …nancial markets structure, allowing for international trading in multiple assets and subject to …nancial intermedia-tion costs. Two di¤erent forms of …nancial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of …nancial integration undermine the e¤ectiveness of monetary policy in in ‡uencing domestic output and in ‡ation. Under realistic parameterizations, monetary policy is more, rather than less, e¤ective as the positive impact of strengthened exchange rate and wealth channels more than o¤sets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of …nancial integration with trade integration , varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive e¤ects of …nancial integration are ampli…ed by trade integration. Overall, monetary policy is most e¤ective in parameteri-zations with the highest degree of both …nancial and real integration. Brown Bag Seminar, and an anonymous referee of the SNB Working Paper Series for useful comments. All remaining errors are mine. The views expressed in this paper are those of the author and do not necessarily represent those of the Swiss National Bank. y Swiss National Bank.