Globalization and monetary policy comovement: International evidence

• This paper studies comovement in monetary policy of advanced economies in the period 1980–2009.
• I estimate a dynamic factor model in the panel of residuals of the Taylor rules.
• The common factor explains 24% of residual variation in monetary policy.
• I document that the common factor is more important with rise in trade integration.

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