Globalization and financial instability: Challenges for exchange rate and monetary policy

Purpose – The paper analyses the challenges of globalization for exchange rate and monetary policy. Design/methodology/approach – It first deals with the implications of globalization for the choice of an appropriate exchange rate regime. Then it discusses different strategic aspects of monetary policy in the light of globalization. Finally, it examines the effect of globalization on inflation and the implications of this for the focus on monetary policy. Findings – The main challenge of globalization for exchange rate policy refers to the choice of an appropriate exchange rate regime. Exchange rate policy is constrained by the financial instability tendency effect of globalization insofar as intermediate exchange rate regimes tend to be very unstable. However, globalization may also create the desire to change the focus of monetary policy. Globalization is sometimes argued to reduce inflationary pressures and therefore to “ease” the job of central banks. However, there are caveats with this conclusion or arguments that are discussed in this paper. Originality/value – The paper gives an innovative overview of the various challenges of globalization for monetary policy.