Globalization and Monetary Policy: An Empirical Analysis

This paper studies the evolution of comovement in monetary policy of the G-7 countries during the period 1980-2009. I estimate a Taylor rule for each country and use the residuals from the Taylor rule to estimate a Bayesian dynamic latent factor model allowing for common and Europe speci?c components. I quantify the importance of the G-7 factor in explaining the residual of the Taylor rule, and show that the G-7 factor plays a very important role during the period of globalization (1988- 2003). I esimate the time path of the importance of the G-7 factor using rolling sub-samples, and show that both trade-openness and ?nancial integration increase comovement in monetary policy.