Essays on Inflation Dynamics and Monetary Policy in a Globalized World.

Summary The objective of this thesis is to analyze the effect of globalization on inflation dynamics and monetary policy in a globalized world. In the first chapter, we focus on the impact of financial globalization on inflation targeting behavior in emerging countries, with a particular focus on the exchange rate: does the central bank respond to exchange rate movements? We use quarterly data from six emerging market countries that have been practicing inflation targeting from the date of its adoption until the last quarter of 2009 (2009 Q4). The study is based on a neo-Keynesian small open economy model à la Gali and Monacelli (2005). We use a multiple equation GMM estimator to analyze the relationship. The results show us that the central bank's response to the exchange rate is statistically significant in the case of Brazil, Chile, Mexico and Thailand. However, it is not significant for Korea and the Czech Republic. Theoretically, the result should not be significant even with flexible inflation targeting, where the central bank responds to inflation and output gaps. We believe that the particular characteristics of emerging countries, such as the fear of floating, the lack of development of the financial system and a lack of credibility of the central bank, explain this preoccupation of central banks with exchange rate variations. In the second chapter, we study empirically the relative importance of the transmission channels of monetary policy for Brazil, Chile and Korea. This part is based on monthly data from the adoption of inflation targeting until December 2009 (2009M12). We use a SVAR model, incorporating the main monetary transmission channels simultaneously instead of considering them separately. The empirical results indicate that the exchange rate channel as well as the asset price channel have a relatively higher importance than the traditional interest rate channel or the credit channel for industrial production. The results are very different in the case of inflation, with the exception of Korea. The high ranking of the exchange rate channel and the asset price channel are consistent with the results of Gudmundsson (2007): the exchange rate channel may have become increasingly important with the development of financial globalization.In the third chapter, we empirically study the role of openness - real and financial - on inflation dynamics in Brazil, Chile and South Korea. The study is based on monthly data, from the adoption of inflation targeting until December 2009. In this last chapter, we use Generalized Method of Moments (GMM). The ratio of imports to GDP is taken as the indicator of real openness. With respect to financial openness, we consider alternatively the Chinn and Ito (KAOPEN) index measuring the degree of liberalization of financial account transactions, and the indicator proposed by Lane and Milesi-Ferreti (2009).We conclude in this chapter that there is generally a positive relationship between real openness and inflation. With respect to financial openness, the results are less clear-cut and depend largely on the indicator used to measure financial openness.