Central Banks in Chains? Global Value Chains and Monetary Policy Transmission

• In Event: Contemporary Developments in Monetary Politics

Abstract

A puzzle in international relations has been the disappearance of neo-mercantilism as a viable, political strategy for export-led development. I explore this puzzle by developing a theory of exchange rate politics that explicitly accounts for the increasing importance of trade in intermediate goods and services|i.e., global value chains (GVCs). In a previous paper, I find that GVCs undercut the benefits of running a depreciated exchange rate beyond its cost. Missing in this theory, however, is a clear political transmission mechanism that connects GVC participation to exchange rate outcomes. One mechanism would follow the "invested interest" approach of Frieden (1991; 2014), which focuses on individual exchange rate preferences and then an upward transmission of these preferences to policy outcomes via lobbying, votes, etc. In this paper, I investigate a second transmission mechanism, modeling the state as a unitary actor seeking to appease a majority of voters. I conduct textual analysis on central bank minutes and policy discussions from 13 economies (Australia, Brazil, Chile, Colombia, Iceland, Japan, Korea, Mexico, Philippines, Sweden, Thailand, Turkey, and the United Kingdom) and the United States, for which minutes are available but not the policy discussions.These quarterly/monthly publications offer a first glimpse of how monetary policy is affected by global value chains across a sample of advanced and developing economies, including two so-called currency manipulators, Japan and Korea. After scraping over 1,000 documents of published minutes from 14 economies between 2010 and 2018, I utilize textual analysis to understand how global value chains affect monetary policy at the national level during the post-crisis economic recovery. This paper seeks to understand how GVCs affect monetary policy at the national level and, if there is a change in monetary policy linked to GVCs, if this explains the currency revaluations found in my previous work.

Author

• Ryan Weldzius, Princeton University