June 15, 2007
International Monetary Seminar - June 11-15, 2007
Summary of the workshops
Ladies and Gentlemen,
I am pleased to present to you a summary of the two workshops held during the 9th international
monetary seminar, the first of which was devoted to “economic globalisation and the conduct of
monetary policy”, and the second to “globalisation and financial stability”.
First of all I would like to thank the contributors and participants for their rich and varied contributions
and exchanges, and in particular the organisers of the two workshops, Enisse Kharroubi and Olivier
Loisel for workshop 1, and Arnaud Bervas and Laure Frey for workshop 2. I am particularly grateful
for the help they have given me in putting together this summary.
While the subjects dealt with in the two workshops are quite separate, there are of course considerable
interactions between them, and my presentation will attempt to reflect this.
The discussions started with a description of the globalisation movement and its acceleration, before
moving on to study its effects on inflation, the functioning of financial markets, and lastly, monetary
I/ The rate of globalisation has been accelerating. What are its key features?
The first part of the discussions reflects and complements the plenary sessions. It also relates to Eric
Chaney’s contribution, which addressed the “new globalisation” (or “modern globalisation”, as he
described it in his paper). It is indeed important that central banks understand the various aspects of
this movement, its rhythm and its likely outcome.
Two key features emerged:
- a broadening of the areas affected by globalisation,
- the self-sustaining nature of the movement.
1. 1. Broadening of the areas affected by globalisation
Globalisation is a multi-faceted phenomenon: it can be defined as the increase in international flows
and exchanges of goods and technology, labour and financial products. I shall address each of these
1. 1.1. The goods market
We have seen:
- the growing volume of exports from emerging countries, especially China, in tandem with falls in the
relative prices of the goods produced, which in turn accelerated the rate of loss of market share by
OECD countries from the mid-1990s onwards;
- since 1997, a new form of growth in Asian countries based on external growth, resulting in
accumulation of current-account surpluses;
- increased demand in the oil and commodity markets, especially from emerging countries, which
benefits the countries producing these commodities (Middle East and Latin American emerging
countries, and Canada), even if producers’ strategies also have to be taken into account (arbitrage
dollar / oil price in order to maintain the purchasing power of oil revenues, and increasing effect of
short term supply shocks in the absence of excess capacities);
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- marked growth in trading of intermediary products, which is altering the nature of specialisation and
creating a new international division of labour (China now produces more technology-intensive
goods). This also makes it harder to assess the implications of current developments.
1.1.2 The labour market
We have seen:
- sharp growth in the global labour force through increased mobility of the workforce in developing
countries (Freeman’s “great doubling”),
- work force migrations (this affects all countries : the United Kingdom and Spain –mainly affected by
immigration– have both stressed the importance of inflows of labour for their countries.)
However, this effect is difficult to quantify:
- empirically speaking, it has been hard to assess the impact of globalisation on labour demand at the
sectoral level. This is what is emerging from studies currently carried out by the ECB on labour
demand: an indicator of trade openness has no significant economic or statistical effect, whereas in
theory, the effect is uncertain over the short term (the negative impact of competition in the goods
market is offset by the effect of positive income resulting from lower prices for intermediate goods);
conversely, over the long term, the impact should be positive;
- it is possible that the only effect of migrations on wages is the direct impact on the migrant
populations themselves. In general, the most recent studies on the effect of migration (especially those
by H. Boulhol) appear to suggest that the impact may be less than initially expected.
1.1.3 Capital markets
It is notable that globalisation is a multi-faceted movement that is difficult to quantify in its breadth. It
consists simultaneously of:
- increased liquidity (money or credit in relation to GDP), which is nevertheless difficult to quantify
due to securitisation, which gears up the assets derived from a single underlying asset and is a cause of
significant leverage. These sources of additional liquidity for financial players, which are inherent in
the market, are difficult to identify in terms of location and value; increased foreign exchange reserves,
and development of foreign direct investments,
- lower risk premiums, particularly notable for some emerging countries;
- additional movements of funds consisting of migrant workers’ remittances (which play an important
role in some countries).
1.2. The interaction between these various elements makes it impossible to foresee an end to the
globalisation process in the near future
The second feature of the current wave of globalisation is the interaction between these various
elements, which creates a self-sustaining phenomenon. In fact, at the macro-economic level we can see
mutually enriching bi-directional relations developing between real or economic globalisation, and
financial globalisation. There is also a micro-economic element to this movement.
1.2.1 Real globalisation favours financial globalisation
The linkage is as follows, with the sometimes representing bi-directional relations:
real globalisation 1: more rapid growth in emerging countries
2 : pressure on commodity prices, especially oil
balance of payments surpluses in emerging countries and global imbalances accumulation of
reserves increase in global liquidity low level of real interest rates
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1.2.2 Financial globalisation underpins real globalisation
low level of real interest rates accumulation of capital and capital flows increased productivity
and/or economic development in emerging countries globalisation gathers pace
1.2.3. The emergence of non-financial companies operating on a global scale, and of global financial
institutions, drives the globalisation of the financial markets
Also, at the micro-economic level, big companies that are particularly gaining from globalisation and
the possibility of managing their manufacturing activities on a global scale are driving harmonisation
of the financial systems, and pushing globalisation forward. This change is affecting both
industrialised and emerging countries. The most recent manifestation of this is the acquisition of
European and US firms by emerging countries.
So for the time being there is no indication that the rate of globalisation has started to level off.
However, globalisation is not the cause of all of these changes and discussions have sought to
distinguish between the respective contributions of “globalisation/good policy/good luck”, and the low
level of inflation in particular.
II/ Impact on the causes of inflation
The key question for central banks is to establish what are the effects of globalisation on inflation.
Although new investigative methods have been applied, the answers so far have been provisional,
especially with regard to a number of fundamental questions.
2.1. Renewal of methods: theoretical or empirical studies
In addition to the studies presented at the plenary sessions, the workshops highlighted the existence of
a number of current studies currently underway in the form of theoretical models or econometric
2.1.1 Theoretical models
In view of the interaction between the various factors behind globalisation, the use of general
equilibrium models appears to be particularly appropriate, as demonstrated by the studies carried out
by the Bank of England (BoE) and the Bank of Canada (BoC). The experiment consisted of studying
the response to a productivity shocks (productivity in Asian countries is catching up with that in the
West, with the migration of rural populations creating a leap in productivity comparable to the
situation of western countries after the second world war, as the workforce moved away from
agriculture into industry). The BoE model, which only presents broad macroeconomic features, does
not however reproduce all of globalisation’s “stylized facts”, especially with regard to financial
globalisation (falling real interest rates where the model projected a rise, and current-account surpluses
in emerging countries where the model projected a deficit caused by the increased investment effort).
In the BoC model, gains in productivity lead to a depreciation of the real exchange rate in China,
resulting in lower import costs. With greater sectoral detail (the impact on the oil market is modelled),
the model reproduces the temporary hike in headline inflation and the fall in underlying inflation.
Again, the modelling of the financial sector, currently non-existent, needs further work.
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2.1.2 Empirical studies
After the discussion at the plenary session about the assessment of the causes of inflation, and
contributions by Andrew Filardo and Claudio Borio on the increased role of the global output gap, and
by Nigel Pain (and co-authors), discussions at the workshop revisited these questions, with a
contribution from the US Federal Reserve. One conclusion was the limited impact of the external
output gap on the United States, which puts the issue back on the agenda.
2.2. Is there a consensus on the responses to the questions?
What have we learned, overall, and is there a consensus?
2.2.1 Yes, on the overall impact
Most studies point to the low deflationary impact of globalisation: the direct import channel is only
really relevant over the short term. As for indirect imports, sensitivity to domestic business cycles has
decreased in developed countries.
2.2.2 …but not yet on the transmission channels
A number of questions persist concerning the indirect channels through which the effects of
globalisation are transmitted.
* firstly, it is important to understand the effect of margins, in so far as we can see a simultaneous (i)
fall in mark-ups on the goods markets, (ii) fall in the share of wages in value added (“labour share”)
which depends on wage earners’ bargaining power in the labour market and (iii) increase in company
profits. To shed light on this question, a Banque Nationale Suisse model tries to explain the correlation
between lower mark-ups and lower real interest rates. Rather than explaining it as a static trade-off
between real and financial investment, the model suggests an inter-temporal trade-off linked to an
unexpected shock in terms of globalisation. The sequence is as follows: globalisation lower import
costs lower margins higher real income reduction in the inter-temporal substitution of
consumption fall in real interest rates. However, the model does not explain the apparent
contradiction with the increase in profits, which can be explained by a compensatory increase in the
volume of production, which more than compensates the fall in profits per unit;
* next, the positive effect of globalisation on productivity is not borne out by the figures, perhaps also
as a result of short-term “composition” effects;
* moreover, the impact of higher oil prices is unclear (lower reliance on energy, a lower real oil price
today than after the second oil price shock);
* lastly, a number of other factors have come into play (more prominent role of price-competitiveness
in an area of fixity of exchange rates as in the euro zone, the effect of structural reforms on wage
moderation, but this question will be taken up by the panel).
III/ The impact of globalisation on the financial systems
Moving on to financial globalisation, a two-fold movement is apparent: development of the financial
systems caused by an intense process of financial innovation that affects both private and public
players, and the appearance of new challenges in the area of risk management.
3.1. A process of financial innovation that affects both private and public players
While financial innovation affects the private sector most of all, globalisation is forcing public players
to be innovative in their management of reserves.
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3.1.1 The dynamic of financial innovation in the private sector
Financial innovation consists of both the development of new products and the appearance of new
* as far as new products are concerned, different explanations are offered for the different forms that
financial innovation takes in ‘advanced’ and emerging countries, since in emerging countries it is
more a question of catching up with or imitating the “advanced” countries operating at the
“technological frontier”, as Ph. Agion puts it. With a strategy of imitation, the objective is to remedy
the deficit highlighted by Caballero (and his co-authors) in terms of the “asset shortage”, which in
itself explains the flow of capital to the United States. It is also about providing a modern financial
infrastructure that can support emerging countries’ economic development. From this point of view,
progress has been impressive, as demonstrated by the development of the fixed-income market in
China, on which the interbank market operates in particular, and similarly the creation of futures
markets in India.
* As for new players, hedge funds appear to be the genuine products of globalisation with assets
invested in commodities and emerging countries. Widespread acceptance of these institutions and their
development of ‘retail’ activities are a sign of maturity (see the Banque de France Financial Stability
Review’s special issue on hedge funds).
* The experience of emerging countries nevertheless demonstrates the importance of “sequencing”
and the role of infrastructures (volatility increased on spot trading on the traditional segment of the
Bombay stock exchange after a futures contract was introduced, but volatility fell on the more liquid
and more modern national segment).
3.1.2 In the public sector, the increased importance of reserves management in a global economy calls
for the implementation of new procedures for ensuring the ‘clean’ origin of incoming capital flows.
The growth in emerging countries’ current-account surpluses results in the accumulation of foreign
exchange reserves, which play a precautionary role in systems with pegged currencies (including
ensuring the continuity of servicing government debt, if this is still substantial). The question of the
optimal level of reserves arises, and proposals for mutualisation of reserves are planned for Latin
America. But it is also important to neutralise the impact on the domestic economy, which may turn
out to be costly. Also, to ensure the effectiveness of this process, some central banks are at times
obliged to issue new reserve securities, or even to implement direct control measures.
3. 2. New challenges in the area of risk management
Globalisation is not a straightforward process, and financial globalisation also gives rise to increased
risks, entailing enhanced supervision.
3.2.1 New channels for transmission of financial shocks
* market contagion in a liquid, interdependent world: while the current abundance of liquidity alters
economic agents’ perception of risk, the risks of shocks spreading through markets as a result of the
information made available to investors is all the greater. It is therefore logical to assume that the risks
of market contagion have increased.
* the more prominent role of the exchange-rate channel
At the same time, globalisation underlines the need to question exchange-rate regimes and the
workshops’ discussions highlighted the advantages and disadvantages of the fixity of exchange rates.
the limitations of the fixity of exchange rates: the 1994 Mexican (“Tequila”) crisis is considered by
numerous observers to be the “first crisis of the 21st century”. These crises tend to display the
following characteristics: (i) increased role of emerging countries in the international financial system;
(ii) temptation of pegging the exchange rate to a dominant currency with which one has important
commercial links (such as peso/dollar), combined with (iii) the contradiction between a financial
system which has not yet reached the level of maturity of industrialised countries, massive debts in
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foreign currencies and fixity of the exchange rate. Against this backdrop, a foreign exchange crisis is
rapidly transformed into a banking crisis (systemic crisis).
however, the move to a free currency is not without problems, as demonstrated by Taiwan between
1986 and 1990, which illustrates mainland China’s current dilemma. While the central bank was
aiming for gradual appreciation of the currency in the context of liberalisation of the current account,
investors sparked a massive appreciation of the currency and large inflows of capital.
3.2.2. New approaches to supervision
Two new dimensions became apparent during the discussions:
* in open banking systems, in which a very large proportion of the banks are subsidiaries of foreign
groups, there is a need for cooperation between home and host supervisory authorities. The problem
then arises of the lender of last resort and ‘burden sharing’ in the event of having to rescue a foreign
* the prominent role of market mechanisms: nowadays the emphasis is on the indirect regulation of
hedge funds, entailing a new, market-based vision by supervisory authorities (by the nature of things,
due to the complexities involved, but also so as to avoid hindering financial innovation, based on the
maturity of these institutions (cf. Amaranth’s difficulties, twice as large as LTCM in 2006)).
* reintroduction of “stress tests” and “contingency plans” (also needed for dealing with global
IV/ Consequences for monetary policy
A subject addressed by both workshops. Recent monetary policy has delivered low levels of inflation,
but can it claim the credit for all the benefits of the current situation? Is there a clear outlook for the
coming years? Three questions arise: what are the indicators? What are the objectives? What are the
4.1 Uncertainties surrounding indicators
4.1.1. No consensus on the interpretation of the flattening of the Phillips curve
Most studies highlight a flattening of the Phillips curve, even if “composition” effects may be present.
This situation raises questions concerning both its consequences for sacrifice ratios and the impact of
globalisation on this development.
On this first point, the flattening of the Phillips curve may initially signify an increase in the sacrifice
ratio (i.e., by how much is it necessary to increase unemployment to obtain a one percentage point
reduction in the inflation rate). In fact, the sacrifice ratio is also negatively affected by the increased
weight of expectations (the growing weight of the “prospective” part of the Phillips curve) and by the
increased credibility of monetary policy. It becomes clear that a change in the steepness of the Phillips
curve is accompanied by a downwards shift of the curve.
On the second point, some empirical studies allegedly indicate that it is monetary policy that causes
the flattening of the Phillips curve, and that globalisation has only a residual influence.
In spite of changes made to the indicators, these results confirm the important role of monetary policy
in a global environment.
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4.1.2 Abundant liquidity, but no effect so far on inflation in the goods market
In this context, our analysis of the indicators focuses on the impact of liquidity on asset prices
(property prices in numerous countries, China and India). It poses further questions on the change in
4.2. Change of objectives
4.2.1 Favourable conditions for implementing inflation targeting strategies
The current low-inflation environment is leading many countries to adopt inflation targeting strategies.
The contribution of globalisation to low inflation is also of interest. In the case of Latin American
countries, it would appear to be more a result of a consensus of public opinion, picked up and carried
by the governments of these countries. But [for] countries joining the EU, attaining both price stability
and exchange-rate stability is difficult at times.
4.2.2. Core/headline inflation
Core inflation – the index of underlying inflation – excludes oil prices but does not correct other
effects related to globalisation which are causing the cost of imported goods to fall. Hence the
proposal to use core inflation when introducing an inflation targeting strategy, and then the headline
index if successful. Some countries use core inflation as an intermediate target.
4.3. New dilemmas: is there a risk of free riding?
Is there a more rapid sanction (Romer, 1993 or Lane, 19971) or, on the contrary, in a context of
reducing risk premiums, a lack of sanctions for countries that pursue unsustainable policies or fail to
Generally speaking, prudence remains in place (the role of central banks is confirmed):
- the traditional framework to analyse inflation developments has changed;
- uncertainties remain about perception of risk in an environment where liquidity is abundant;
- do we have good data to conclude (problem of measurement of indirect effects)?
- sustainable process, but a change of regime is still possible (non-linearity in a globalised world);
need to prepare for this eventuality.
O. de Bandt
1 In Lane’s 1997 model, monetary stimulation only affects non-exchangeable goods, but the relative proportion of these
decreases with globalisation.
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