Globalization and Monetary Policy

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Merim Imamovic
July 11, 2012
INR 3703
Question 1
Globalization is one of the most talked about topics in the world and has been for the past decade and more, and it has affected the world in all different ways but the one I’m going to talk about is the one it has had on the monetary structure. Monetary policy was implemented so that central banks could influence the availability and cost of money and credit, so that they could stimulate growth in the national economy. In today’s globalized world services, goods, workers, money and ideas move to wherever they need to be so that they can work together in a more efficient manner that would be more profitable. Monetary policy plays several roles in a globalized economy; it has the capability to support the price equilibrium of a economy or it can it can support the degree of international risk sharing, it would do this by improving risk hedging properties of nominal bonds in ideal portfolios. Each of these roles is reliant on each other, which in return financial globalization does not affect the main goals of the monetary policy. Many believe that globalization has weakened the monetary policy and has caused the erosion of the free flow of goods and capital around the world that is undermining one of its primary jobs, which is controlling inflation on their national borders. Globalization has started to create new challenges; central banks small and large still remain control of a large amount of power to keep inflation in check. In this new globalized economy, foreign development will be one of the sources for economic disturbances, which central banks will have to respond to. "But there is little reason to fear that the capacity of national central banks to stabilize domestic inflation will be weakened by increasing openness of national economies. Thus it will continue to be appropriate to hold national central banks responsible for domestic inflation outcomes."(Thomas L. Friedman) This new globalization...
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