Does globalisation discipline monetary policymakers?

Abstract

This paper analyses globalisation using a small general equilibrium model. It concludes that whether increased openness (a reduction in the costs of international trade) helps to discipline monetary policy in large open economies depends on the type of trade costs. Moreover, to the extent that globalisation induces stronger competition in the goods market, this may also have an adverse effect on monetary policy discipline. The latter is due to international expenditure switching, which becomes a more forceful channel as competition intensifies. Thus, the answer to the question in the title is not necessarily affirmative.