February 13th, 2015
from the Dallas Fed
Several decades of increasing global economic integration - or globalization - have left their mark. Whether this structural shift has altered the conduct of monetary policy or its ability to promote economic stability over the business cycle has long been debated.1 Woodford (2010), among others, convincingly argued on theoretical grounds that globalization does not necessarily imply a weakening of the ability of national central banks to influence domestic output and inflation. However, the question of monetary policy effectiveness is only part of the story.
As Bernanke (2007) puts it, our current understanding is geared toward the view that "[a]t the broadest level, globalization influences the conduct of monetary policy through its powerful effects on the economic and financial environment in which monetary policy must operate." Much of the literature - including my own work - has in fact focused on how globalization may have changed the economic environment and, thus, altered the trade-off between output and inflation volatility for monetary policy. It is known that the business-cycle volatility of the largest economies, including the U.S., has shifted significantly during the post-World War II period. The question, then, is to what extent those changes reflect globalization?