The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
April 24, 2007
Does Globalization Make Monetary Policy Harder?
According to the Financial Times, the answer is "maybe", but the message is a bit tricky. On the one hand:
... Take the renewed worries about how energy costs might contribute to broader price pressures...
Such cost contagion is, of course, not enough to cause inflation expectations to rise. Rather, it broadly shows markets doing their job in reacting to changes in relative prices. Higher oil prices encourage the use of substitutes. They also shift demand to goods and services less affected by the shock. As long as monetary policy remains steady, the end-result would still be painful but not inflationary.
That is right on target, but:
... According to conventional wisdom, globalisation has been one of the chief reasons why the loose monetary policy of the past decade has not translated into swifter consumer price inflation. Cheap imports from India and China were said to have eroded the pricing power of, say, US companies at home.
That view always raised a few questions, such as how long any such damping effect might last. Intriguingly enough, rising oil prices may already have caused it to wane.
Since the "cheap import" phenomenon is just another variant of "changes in relative prices", the article's first observation is perfectly apt: "As long as monetary policy remains steady, the end-result would still be painful but not inflationary." But the author of the article apparently has something a little more complicated in mind:
Recent research by two economists, Paul Bergin and Reuven Glick, suggests prices of a wide range of goods did indeed converge globally – until about 1997. Since then, prices have drifted apart again, perhaps owing to rising transport costs.
Here, more specifically, is what Bergin and Glick uncover:
This paper documents significant time-variation in the degree of global price convergence over the last two decades. In particular, there appears to be a general U-shaped pattern with price dispersion first falling and then rising in recent years, a pattern which is remarkably robust across country groupings and commodity groups... However, regression analysis indicates that this time-varying pattern coincides well with oil price fluctuations, which are clearly time-varying and have risen substantially since the late 1990s. As a result, this paper offers new evidence on the role of transportation costs in driving international price dispersion.
The implication seems to be that globalization -- increasingly open trade, more precisely -- has introduced patterns in observed prices that make it more difficult to disentangle relative price changes from trend inflation. There does not yet appear to be much evidence of such a problem appearing in the behavior of long-term inflation expectations:
Nonetheless, it is worth thinking about the FT's suggestion that the types of influences identified by Bergin and Glick "could make monetary policy a lot trickier going forward."
TrackBack URL for this entry:
Listed below are links to blogs that reference Does Globalization Make Monetary Policy Harder? :
- A First Look at Employment
- Weighting the Wage Growth Tracker
- GDPNow's Forecast: Why Did It Spike Recently?
- How Low Is the Unemployment Rate, Really?
- What Businesses Said about Tax Reform
- Financial Regulation: Fit for New Technologies?
- Is Macroprudential Supervision Ready for the Future?
- Labor Supply Constraints and Health Problems in Rural America
- Building a Better Model: Introducing Changes to GDPNow
- How Ill a Wind? Hurricanes' Impacts on Employment and Earnings
- March 2018
- February 2018
- January 2018
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- May 2017
- April 2017
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth