Introduction
Modern narratives often suggest that in the era of globalization, central banks have lost real influence over domestic inflation. However, analyses by experts such as Michael Woodford or Boivin and Giannoni prove that monetary policy remains effective. This article explains why monetary authorities are still at the helm, how reaction rules to external shocks are evolving, and why blaming price increases on "global factors" is a logical fallacy. Readers will learn how different economic models—from India to Israel—adapt to global capital flows and why central bank autonomy remains the foundation of stability.
Globalization: Central Banks Maintain Price Control
Michael Woodford: the primacy of domestic policy over global policy is an analytically confirmed fact. Woodford debunks global factors: the myth of losing control over inflation, pointing out that the central bank maintains a monopoly on creating the monetary base. Even if globalization lowers the natural interest rate, making it an external parameter, an appropriate reaction rule allows for the effective anchoring of inflation expectations. Boivin and Giannoni: the stability of monetary transmission confirm this empirically—the economy's response to changes in Fed interest rates has remained nearly constant for decades. Most fluctuations in GDP and prices still depend on domestic forces rather than "global slack" in production capacity.
India: The Impossible Trinity Necessitates Capital Controls
Modern oil shocks: declining energy intensity protects the economy from the stagflation known from the 1970s. The credibility of the inflation target and wage flexibility are key here. However, in countries like India: the impossible trinity necessitates capital controls, as raising rates to fight inflation attracts speculative capital, complicating reserve sterilization. In such realities, debt dollarization destabilizes emerging markets, creating insolvency risks during exchange rate fluctuations. Therefore, India: financial stability supports the inflation target as an equal task—the central bank must use interventions and macroprudential tools to shield the economy from external instability.
NBP Strategy: Prioritizing Autonomy in an Open Economy
A comparison of Israel vs. France: two paths of adaptation to globalization shows that the model of capitalism filters market influence: Israeli innovation accepts exchange rate volatility, while French dirigisme seeks social protection. For central banks, domestic inflation: a more stable target than the CPI, as it avoids sharp economic contraction in response to import shocks. Local Currency Pricing: an anchor for monetary policy (LCP) means the exchange rate loses its role as a price arbiter, which the Taylor rule: incorporating the exchange rate into the model must account for. NBP strategy: the priority of autonomy in an open economy requires focusing on core inflation and the globally-determined natural rate, knowing that central bank coordination: negligible gains for nations makes local responsibility crucial.
Summary
Will central banks become puppets in a theater of global illusions? Analysis shows that blaming external factors while declaring independence is a fundamental logical contradiction. If an institution retains its instruments and credibility, responsibility for price stability remains local. Globalization changes the parameters of the game but does not deprive players of the chance to win. The future of monetary policy depends on rejecting dogmas and developing a new rationality where global awareness supports domestic economic sovereignty.
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