Financial Globalization on the Effectiveness of Monetary and Fiscal policies

Globalization has created fundamental changes in various economic dimensions. In the economic dimension, the most important of these changes are expansion and integration of global markets, such as increasing the flow of finance and international market of capital, production relations and capital exchanges. This paper investigates the impact of financial globalization (FG) on the effectiveness of monetary and fiscal policies in the selected Islamic countries during the period 2000-2019 using the Panel VAR method. The results indicated that FG reduces the changes in GDP by interacting with the liquidity, so FG contributes to the effectiveness of monetary policy. But changes in GDP responded positively to the interactive shocks of FG and interest rates. Therefore, the effectiveness of monetary policy has decreased through interest rate Chanel. Inflation changes do not response to the interactive shocks of FG and liquidity in the long run. Therefore, in the long run, the interaction between FG and the liquidity has no effect on the effectiveness of monetary policy, while changes in inflation show a negative response to the interactive shocks of FG and interest rates. Indeed, the interaction of interest rates and FG reduces changes in inflation and increases the effectiveness of monetary policy through interest rates. Changes of GDP and inflation rates do not show a significant response to the interactive shocks of FG and government spending. Thus, FG in interaction with fiscal policy has no effect on changes in inflation and GDP, so it does not affect the effectiveness of fiscal policy.