How should monetary policymakers respond to the new challenges of global integration?

In a presentation at the Federal Reserve Banks of Kansas City's 2000 symposium, \\"Global Economic Integration: Opportunities and Challenges,\\" Governor Brash of the Reserve Bank of New Zealand highlighted four issues related to global economic integration that affect central banks. First, increasing foreign trade is causing greater integration of countries and regions and thereby increasing the appeal of regional currency zones. Second, growing integration has potentially caused economies to become less inflation prone. Third, global financial institutions are developing at an accelerating rate, raising issues about financial regulation and the transmission of monetary policy. And fourth, the increasing speed with which capital flows around the world is making it more difficult for central banks to achieve domestic objectives.> Focusing primarily on the last issue, Governor Brash described how monetary policy in New Zealand has responded to increased economic integration. Two key challenges are the heightened response of capital flows to changes in monetary policy and the disruptive effects of exchange-rate cycles to the macro economy. Among the key ingredients to successful management of external or internal shocks in an open economy are \\"clear, transparent, and credible objectives\\" and \\"effective risk management.\\" The specific approach in New Zealand has been to adopt an explicit inflation target and to maintain floating exchange rates and an open capital account.