Home Is Globalization Reducing the Ability of Central Banks to Control Inflation? A Literature Review with an Application to the Euro Area
Article
Licensed
Unlicensed Requires Authentication

Is Globalization Reducing the Ability of Central Banks to Control Inflation? A Literature Review with an Application to the Euro Area

  • Salomon Fiedler , Nils Jannsen EMAIL logo , Stefan Reitz and Maik Wolters
Published/Copyright: January 10, 2017

Abstract

Globalization influences inflation and the transmission channels of monetary policy in various ways. The effects of globalization on the ability of monetary policy to control inflation have been discussed intensively. However, in the light of recent experiences following the global financial crisis with extended periods of disinflation in many advanced economies, the question whether the ability of monetary policy to control inflation has suffered significantly from increasing globalization has received new relevance. Based on a review of the literature, this paper discusses whether globalization is reducing the ability of central banks to control inflation and draws conclusion for the current situation in the euro area. We find that globalization has made it more complicated for central banks to ensure price stability and that it has tended to reduce the ability of monetary policy to control inflation in the short- to medium-run. However, in principle the ECB is still able to control inflation but may have to tolerate deviations from its inflation target for somewhat longer periods.

JEL Classification: E31; E52; F62

Acknowledgment

This paper is based on a Briefing Paper that was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of November 2015 between ECON and the European Central Bank (Fiedler et al., 2015). The authors thank Mewael F. Tesfaselassie for highly appreciated comments and discussions.

References

Anderton, R., A. Galesi, M. Lombardi and F. di Mauro (2009): Key Elements of Global Inflation, University of Nottingham, Research Paper Series, Research Paper 2009/22, http://www.nottingham.ac.uk/gep/documents/papers/2009/09-22.pdf (accessed February 11, 2016).Search in Google Scholar

Benigno, P. and F. Faia (2016): Globalization, Pass-Through and Inflation Dynamics. International Journal of Central Banking, forthcoming.Search in Google Scholar

Boysen-Hogrefe, J., N. Jannsen and C.-P. Meier (2015): A Note on Banking and Housing Crises and the Strength of Recoveries, Macroeconomic Dynamics 20, 1924–1933.10.1017/S1365100515000164Search in Google Scholar

Calza, A. (2009): Globalization, Domestic Inflation and Global Output Gaps: Evidence From the Euro Area. International Finance 12(3), 301–320.10.1111/j.1468-2362.2009.01248.xSearch in Google Scholar

Campa, J. and L. Goldberg (2005): Exchange Rate Pass-Through Into Import Prices. Review of Economics and Statistics 87, 679–690.10.1162/003465305775098189Search in Google Scholar

Campa, J. and J. M. Gonzalez Minguez (2006): Differences in Exchange Rate Pass-Through in the Euro Area. European Economic Review 50(1), 121–145.10.1016/j.euroecorev.2004.12.002Search in Google Scholar

Carney, M. (2015): Inflation in a Globalized World, Remarks at Federal Reserve Bank of Kansas City Economic Symposium, http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech837.pdf (accessed February 11, 2016).Search in Google Scholar

Chen, N., J. Imbs and A. Scott (2009): The Dynamics of Trade and Competition. Journal of International Economics 77(1), 50–62.10.1016/j.jinteco.2008.10.003Search in Google Scholar

Chung, K., J. E. Lee, E. Loukoianova, M. H. Park and M. H. S. Shin (2014): Global Liquidity through the Lens of Monetary Aggregates, IMF Working Paper 14/9, http://www.researchgate.net/profile/Elena_Loukoianova/publication/260019453_Global_Liquidity_through_the_Lens_of_Monetary_Aggregates/links/0f31752f1395cefaa1000000.pdf (accessed February 11, 2016).10.5089/9781475514551.001Search in Google Scholar

Ciccarelli, M. and B. Mojon (2010): Global Inflation. The Review of Economics and Statistics 92(3), 524–535.10.1162/REST_a_00008Search in Google Scholar

Clark, T. E. (2004): An Evaluation of the Decline in Goods Inflation, Economic Review, Second Quarter, 19–51, Federal Reserve Bank of Kansas City.Search in Google Scholar

Coibion, O. (2012): Are the Effects of Monetary Policy Shocks Big or Small? American Economic Journal: Macroeconomics 4(2), 1–32.10.3386/w17034Search in Google Scholar

Constâncio, V. (2015): Understanding Inflation Dynamics and Monetary Policy, Remarks at Federal Reserve Bank of Kansas City Economic Symposium, https://www.kansascityfed.org/~/media/files/publicat/sympos/2015/econsymposium-constancio-paper.pdf?la=en (accessed February 11, 2016).Search in Google Scholar

Cwik, T., G. J. Muller and M. H. Wolters (2011): Does Trade Integration Alter Monetary Policy Transmission? Journal of Economic Dynamics and Control 35(4), 545–564.10.1016/j.jedc.2010.11.006Search in Google Scholar

di Mauro, F., R. Rueffer and I. Bunda (2008): The Changing Role of the Exchange Rate in a Globalised Economy, ECB Working Paper 94, https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp94.pdf?f755913d8afa62def9860762163a7e52 (accessed February 11, 2016).Search in Google Scholar

Deutsche Bundesbank (2016): Globalisierung und die Transmission globaler finanzieller Schocks in die EWU-Mitgliedstaaten – Folgen für die (nationale) Wirtschaftspolitik, Deutsche Bundesbank monthly report, September 2016, https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentlichungen/Monatsberichtsaufsaetze/2016/2016_09_globalisierung_transmission.pdf?__blob=publicationFile.Search in Google Scholar

Dovern, J. and N. Jannsen (2015): Systematic Errors in Growth Expectations over the Business Cycle, Kiel Working Paper 1989, Kiel Institute for the World Economy, https://www.ifw-members.ifw-kiel.de/publications/systematic-errors-in-growth-expectations-over-the-business-cycle/systematic-errors-in-growth-expectations-over-the-business-cycle (accessed February 11, 2016).Search in Google Scholar

European Central Bank (1999): Monthly Bulletin, January 1999.Search in Google Scholar

European Central Bank (2016): ECB Website on “Medium-term orientation”, https://www.ecb.europa.eu/mopo/strategy/princ/html/orientation.en.html (accessed 5 October 2016).Search in Google Scholar

Fiedler, S., N. Jannsen, S. Reitz and M. Wolters (2015): Is Globalization Reducing the Ability of Central Banks to Control Inflation? In-Depth Analysis prepared for the Monetary Dialogue of the European Parliament. https://polcms.secure.europarl.europa.eu/cmsdata/upload/bc3882f6-786a-42ba-b6e5-92507f2ba97e/KIEL_FINAL.pdfSearch in Google Scholar

Forbes, K. and F. Warnock (2012): Capital Flow Waves: Surges, Stops, Flight, and Retrenchment. Journal of International Economics 88, 235–251.10.3386/w17351Search in Google Scholar

Forbes, K., I. Hjortsoe and T. Nenova (2015): The Shocks Matter: Improving Our Estimates of Exchange Rate Pass-Through, External MPC Unit Discussion Paper No. 43, Bank of England.10.2139/ssrn.2691512Search in Google Scholar

Georgiadis, G. and A. Mehl (2015): Trilemma, not Dilemma: Financial Globalisation and Monetary Policy Effectiveness, Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper 222, http://www.dallasfed.org/assets/documents/institute/wpapers/2015/0222.pdf (accessed February 11, 2016).10.24149/gwp222Search in Google Scholar

Goodhart, C. (1999): Central bankers and uncertainty. In: Bank of England: Quarterly Bulletin, February 1999.Search in Google Scholar

Gopinath, G. (2015): The International Price System, NBER Working Paper 21646, http://www.nber.org/papers/w21646.pdf (accessed February 11, 2016).Search in Google Scholar

Gopinath, G., O. Itskhoki and R. Rigobon (2010): Currency Choice and Exchange Rate Pass-Through. American Economic Review 100(1), 304–336.10.3386/w13432Search in Google Scholar

Gordon, R. J. (2007): Phillips Curve Specification and the Decline in U. S. Output and Inflation Volatility. Paper presented at Symposium on the Phillips Curve and the Natural Rate of Unemployment, Institut fur Weltwirtschaft, Kiel Germany, June 4.Search in Google Scholar

Gordon, R. J. (2013): The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery, NBER Working Paper 19390.10.3386/w19390Search in Google Scholar

Gourinchas, P.-O. and M. Obstfeld (2012): Stories of the Twentieth Century for the Twenty-First. American Economic Journal: Macroeconomics 4, 226–265.10.3386/w17252Search in Google Scholar

Helbling, T., F. Jaumotte and M. Sommer (2006): How Has Globalization Affected Inflation? World Economic Outlook April 2006, chapter 3, https://www.imf.org/external/pubs/ft/weo/2006/01/pdf/c3.pdf (accessed February 11, 2016).Search in Google Scholar

Issing, O. (2003): Monetary and Financial Stability – Is There a Trade-off? Speech at Bank for International Settlement conference on “Monetary Stability, Financial Stability and the Business Cycle”, Basel, March 2003.Search in Google Scholar

Jannsen, N., G. Potjagailo and M. Wolters (2015): Monetary Policy during Financial Crises: Is the Transmission Mechanism Impaired? Kiel Institute for the World Economy, Kiel Working Paper 2005, https://www.ifw-members.ifw-kiel.de/publications/monetary-policy-during-financial-crises-is-the-transmission-mechanism-impaired (accessed February 11, 2016).Search in Google Scholar

Jochem, A. and S. Reitz (2014): What Impact Do Global Factors Have on Stock Market Movements in Emerging Market Economies? Intereconomics – Review of European Economic Policy 49(5), 268–271.10.1007/s10272-014-0508-9Search in Google Scholar

Leamer, E. E. (1996): Wage Inequality From International Competition and Technological Change: Theory and Country Experience. The American Economic Review 86(2), 309–314.Search in Google Scholar

Marazzi, M., N. Sheets, R. Vigfusson, J. Faust, J. Gagnon, J. Marquez, R. Martin, T. Reeve and J. Rogers (2005): Exchange Rate Pass-through to U.S. Import Prices: Some New Evidence, International Finance Discussion Papers 833, http://www.federal‌reserve.gov/pubs/ifdp/2005/833/ifdp833.pdf (accessed February 11, 2016).10.17016/IFDP.2005.833Search in Google Scholar

Martínez-García, E. and M. A. Wynne (2010): The Global Slack Hypothesis, Federal Reserve Bank of Dallas Staff Papers 10, https://www.dallasfed.org/assets/documents/research/staff/staff1002.pdfSearch in Google Scholar

Mishkin, F. S. (2007): Inflation Dynamics. International Finance 10(3), 317–334.10.3386/w13147Search in Google Scholar

Mishkin, F. S. (2008): Globalization, Macroeconomic Performance, and Monetary Policy; NBER Working Paper 13948; http://www.nber.org/papers/w13948.pdf (accessed February 11, 2016).10.3386/w13948Search in Google Scholar

Obstfeld, M. (2014): Trilemmas and Tradeoffs: Living with Financial Globalization, Paper commissioned for the Asian Monetary Policy Forum, Singapore, http://abfer.org/docs/ampf/2014/Trilemmas_ampf-paper.pdf (accessed February 11, 2016).Search in Google Scholar

Obstfeld, M. and A. Taylor (2004): Global Capital Markets: Integration, Crisis, and Growth. Cambridge University Press, Cambridge, UK.10.1017/CBO9780511616525Search in Google Scholar

Ostry, J. D., A. R. Ghosh, M. Chamon and M. S. Qureshi (2012): Tools for Managing Financial-Stability Risks From Capital Flows. Journal of International Economics 88, 407–421.10.1016/j.jinteco.2012.02.002Search in Google Scholar

Pain, N., I. Koske and M. Sollie (2008): Globalization and OECD Consumer Price Inflation, OECD Economic Studies 44, 2008/1, http://www.oecd.org/eco/42503918.pdf (accessed February 11, 2016).10.1787/eco_studies-v2008-art4-enSearch in Google Scholar

Reinhart, C. M. and K. S. Rogoff (2009): This Time It’s Different: Eight Centuries of Financial Folly. University Press, Princeton, NJ.10.1515/9781400831722Search in Google Scholar

Rey, H. (2013): Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence. In: Global Dimensions of Unconventional Monetary Policy, 2013 Jackson Hole Symposium Proceedings, https://www.kansascityfed.org/publicat/sympos/2013/2013rey.pdf (accessed February 11, 2016).Search in Google Scholar

Roberts, J. M. (2006): ‘Monetary Policy and Inflation Dynamics’. International Journal of Central Banking 2, 193–230.Search in Google Scholar

Rogoff, K. (2006): Impact of Globalization on Monetary Policy, Remarks at Federal Reserve Bank of Kansas City Economic Symposium, https://www.kansascityfed.org/Publicat/Sympos/2006/PDF/19Rogoff.pdf (accessed February 11, 2016).Search in Google Scholar

Schularick, M. and A. M. Taylor (2012): Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008. American Economic Review 102, 1029–1061.10.3386/w15512Search in Google Scholar

Smets, F. (2003): Maintaining Price Stability: How Long Is the Medium Term? Journal of Monetary Economics 50, 2003.10.1016/S0304-3932(03)00084-9Search in Google Scholar

Snower, D. J. (2015): A Fresh Look at the Inflation-Unemployment Trade-off, ECB Forum on Central Banking, May 2015, http://www.ecb.europa.eu/pub/pdf/other/ecbforumoncentralbanking2015en.pdf?d5d03ddbd585cea809166add34a05352 (accessed February 11, 2016).Search in Google Scholar

Woodford, M. (2010): Globalization and Monetary Control, in: J. Galí and M. Gertler (eds.), International Dimensions of Monetary Policy. University of Chicago Press, Chicago.10.7208/chicago/9780226278872.003.0002Search in Google Scholar

Published Online: 2017-1-10
Published in Print: 2016-12-1

© 2016 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston

Downloaded on 9.9.2025 from https://www.degruyterbrill.com/document/doi/10.1515/roe-2016-0007/html
Scroll to top button