Globalisation and monetary policy

Globalisation, which has been accelerating since the mid nineties, has triggered important economic changes. The article deals with three possible consequences of globalisation which might be relevant for monetary policy. Possible implications for the conduct of monetary policy are also discussed. The driving force behind the observed low and stable inflation seems to be the enhanced conduct of monetary policy, rather than globalisation. Nevertheless, the emergence of low-cost countries implies some major relative price shifts as commodity prices increase and prices of manufactured goods decline in relative terms. Although neutral in the long run, these relative price changes might pose a challenge for monetary policy, as globalisation is an enduring phenomenon. Therefore, monetary policy analysis should now, more than ever, be based upon a broad range of information and indicators, from which both downward and upward risks to price stability can be inferred. The globally observed flattening of the Phillips curve can be explained by both better monetary policies and structural economic changes, such as globalisation. This flatter Phillips curve would suggest that, in terms of output losses, the short-term costs of disinflation are higher. Given that the flattening of the Phillips curve results from better monetary policies, and that globalisation dampens the inflationary impact of cost push shocks, this finding must be qualified however. Global financial integration partly explains the increased international synchronisation of long term interest rates. At the same time, a weaker correlation between policy rates and longer term interest rates can be observed. These findings suggest that the traditional interest rate channel has become less effective. Given that better anchored inflation expectations are the main reason for this weakening link, one can qualify this finding too. Moreover, communicating information on the economic and monetary analysis can be an important additional tool to steer longer term market interest rates.