Globalization and Monetary Policy Comovement: Evidence from G-7 Countries

Abstract

This paper empirically characterizes comovement in monetary policy of G-7 countries during 1980-2009. I estimate a Taylor rule for each country and use residual from the Taylor rules to estimate a dynamic latent factor model with common and Europe specific factors. I quantify importance of the G-7 factor in explaining comovement in residual variation of monetary policy and show that the G-7 factor is particularly important during a period of globalization (1988-2003). I estimate dynamics of importance of the G-7 factor using rolling sub-samples and show that trade-openness increases comovement in monetary policy in Europe.

Keywords: Comovement in monetary policy, Globalization, Dynamic latent factor model, Bayesian estimation

JEL Classification: C11, C38, F42, E52