[De]Globalisation and inflation
Speech given by
Mark Carney,
Governor of the Bank of England
2017 IMF Michel Camdessus Central Banking Lecture
18 September 2017
I am grateful to Clare Macallan and Iain de Weymarn for their assistance in preparing these remarks. I
would also like to thank Will Abel, Fernando Eguren Martin, Rebecca Freeman, Alex Haberis, Simon
Lloyd, Rana Sajedi, Andrej Sokol, Gregory Thwaites, Thomas Viegas, Matt Waldron and Gabija
Zemaityte for the background research and analysis they conducted as well as Wayne Chapman,
Chris Peacock and Lyndsey Pereira-Brereton for help with the presentation materials.
I. Introduction
During his term as Managing Director, Michel Camdessus oversaw the second great wave of globalisation.
The Berlin Wall fell, capital controls were liberalised, the euro was constructed, and China prepared to join
the WTO. Product and financial markets became increasingly integrated, with trade growing at an annual
rate of 10% and capital flows of 20%. The effective global labour force doubled, and more than a billion
people were lifted out of poverty.
-
Central banks are now grappling with one consequence of such enormous achievements the impact of
globalisation on inflation.
All central banks must consider the cyclical relationship between global slack and domestic inflation; the
degree to which secular forces from globalisation affect local inflation dynamics; and how global factors
influence the stance of domestic monetary policy itself. And now some central banks may need to consider
the implications for price stability if the process of globalisation were to slow or go into reverse.
These issues are particularly relevant to the Bank of England as the UK inflation outlook will be importantly
influenced for some time by a process of de-integration under Brexit.
Today, I would like to draw on this example to illustrate how global factors influence domestic inflation
dynamics and the ability of central banks to achieve price stability.
II. Globalisation and Inflation
While the global Phillips Curve appears alive and well (Chart 1), globalisation has been accompanied by a
weakening in the relationship between domestic slack and domestic inflation (Chart 2),1 and by a
corresponding strengthening in the relationship between global forces and domestic prices.
1
As summarised by the slope coefficients in price and wage Phillips curves. The wage and price Phillips curves had already flattened
during the 1970s and '80s, most likely linked - as Rogoff argued - to the institutional reforms made to monetary policy during that
period. The finding of flattening Phillips curves has been widely documented. For example, Blanchard, O, Cerutti, E and Summers, L
(2015), - Two Explorations and their Monetary Policy Implications', NBER Working Paper
'Inflation and Activity No. 21762, find that the
median Phillips curve slope of 20 advanced and emerging economies fell by more than half between the mid-1970s and the mid-1990s,
from around 1 to around 0.3.
Chart 1: Global Price Phillips Curve?
Notes: Average world output gap and global core CPI inflation (PPP-weighted).
Sources: CEIC, IMF, ONS, Thomson Reuters Datastream and Bank calculations.
Chart 2: Price and Wage Phillips curves have flattened throughout globalisation
Source: BIS 87th Annual Report.
With correlations of headline CPI inflation rates as elevated today as during the first oil shock (Chart 3a),
some contend that global forces have become dominant - a conviction reinforced by the 'missing
disinflations'
in the wake of the global financial crisis2,3 and by the current series of wage puzzles in
2
See, for example, Chapter 3 of the IMF's WEO April 2013, 'The dog that didn't bark: has inflation been muzzled or was it just
sleeping?'.
3
One explanation put forward for this, unrelated to globalisation, is that companies facing liquidity constraints maintained prices at
higher levels than they would otherwise have done in order to preserve cash flows and remain in operation. See Gilchrist, S, Schoenle,
R, Sim, J and Zakrajšek, E (2017), 'Inflation dynamics during the financial crisis',
American Economic Review, Vol. 107, No. 3, pages
advanced economies.4 There are even suggestions that monetary policy frameworks should be overhauled
- potentially lowering the inflation target - in response globalisation's growing impact.5
Chart 3a: Superficially strong evidence of a global inflation cycle
Notes: Correlations calculated using quarterly data on annual inflation rates.
Sources: Thomson Reuters Datastream, National Sources and Bank calculations.
Some perspective is required.
Wage puzzles in advanced economies can be partly solved by recognising that post-crisis structural reforms
have lowered natural rates of unemployment, by broadening measures of labour market slack to include
involuntary underemployment, and by acknowledging that weak wages are one consequence of sustained
poor productivity growth.6
More broadly, the recent high correlations of headline inflation rates have been driven by very large global
shocks including the financial crisis and the commodity super cycle. Core inflation rates have actually
exhibited little co-movement but rather have varied with (divergent) underlying economic conditions (Chart
3b).
785-823. Consistent with this, analysis by Bank staff found that UK businesses with weaker balance sheets increased their margins by
more at the height of the crisis than those with healthier balance sheets.
4
For example, as documented by the Bank for International Settlements (BIS) in their 87th Annual Report, 2017. See also Draghi, M
(2017), 'Accompanying the economic recovery', introductory speech at the ECB Forum on Central Banking 2017 and Danninger, S
(2016) 'What's up with U.S. wage growth and job mobility',
IMF Working Paper 16/122.
5
For example, as suggested by Claude Borio, 'How much do we really know about inflation?', Presentation on the BIS 87th
Annual
Report, 25 June 2017.
6
Inflation Report Inflation
See, for example, the boxes on pages 18-20 of the February 2017 and page 29 of the May 2014 Report. The
solutions to these puzzles are also likely to involve some factors unrelated to globalisation. For example, one explanation put forward
for missing dis-inflation is that companies facing liquidity constraints maintained prices at higher levels than they would otherwise have
done in order to preserve cash flows and remain in operation (see Gilchrist, S, Schoenle, R, Sim, J and Zakrajšek, E (2017), ibid).
Consistent with this, analysis by Bank staff found that UK businesses with weaker balance sheets increased their margins by more at
the height of the crisis than those with healthier balance sheets).
Chart 3b: Core inflation rates exhibited little co-movement post-crisis
See notes and sources to Chart 3a.
Central banks have (thus far) been able to maintain their monetary sovereignty, achieving their mandates by
offsetting the secular disinflationary forces from global integration.
None of this, however, is to downplay current challenges of maintaining price stability in the face of global
forces. The combination of the growing contestability of markets and prolonged synchronised weak demand
may be restraining wage expectations. Moreover, technological changes, particularly those which could
globalise markets for many services, may extend and deepen trend global disinflation. And, the global
financial cycle could exacerbate the challenges of returning domestic inflation to target, particularly given the
proximity of interest rates to the effective lower bound.
Charting a path for monetary policy in this environment thus requires a nuanced understanding of how
globalisation both affects inflation and influences the stance of monetary policy. It is to these I will now turn.
Global Influences on Domestic Inflation
In a closed economy, inflationary pressures depend on developments in domestic costs, which in turn
depend on domestic spare capacity, or the balance of domestic supply and demand.
Opening up the economy changes this relationship in three ways.
Most straightforwardly, external demand exerts pressure on domestic resource utilisation and therefore
domestic inflation. The importance of this channel has steadily increased for most of the past half century
(Chart 4).7
Chart 4: External demand has steadily increased in importance
Sources: IMF and Bank calculations.
-
Next, in an open economy, prices of imports affect domestic inflation both directly through the final goods
- -
and services bought by households and indirectly through the prices of imported intermediates used in
the production of final goods and services in the consumption basket.
For years the direct effect has imparted a steady disinflationary bias. The integration of lower-cost producers
into the global economy acts like an increase in potential supply for advanced economies, raising the level of
spending that is consistent with inflation at target.8 Thus far, this disinflationary effect has mostly affected the
prices of goods9 (Chart 5), as trade in goods has been liberalised to a much greater extent than services.10
Monetary policy makers in advanced economies have responded by accommodating relatively higher
services price inflation in order to meet their inflation objectives. For example, in the UK core goods prices
fell an average of 0.3% over the past two decades, services prices rose by an average of 3.4% and total CPI
inflation was on average at target.11
7
The slowing of trade growth since the financial crisis largely reflects the rotation of global growth to countries with less import intensive
demand, notably the US and EMEs, as well as the declining import intensity of final domestic demand in China as the composition of
growth there rotates towards consumption and services.
8
of cheap imports improves advanced economies' terms of trade -
This positive supply shock comes about because the availability the
price of exports relative to that of imports. For more detail on this channel, see 'Globalisation and Inflation', speech
given by Charles
Bean at the LSE, 24 October 2006.
9
Y, Balakrishnan, R and Shang, B (2016) 'What is keeping US core inflation low?', IMF Working Paper No. 16/124.
Abdih,
10
'A fine
For example, barriers to services trade are estimated currently to be up to three times higher than those for goods trade. See
speech by Mark Carney at the Mansion House, 20 June 2017.
balance',
11
Headline CPI inflation averaged 1.9% over this period.
Chart 5: Sustained, cumulative relative price shock in goods accommodated through higher
services price inflation
Notes: Six-month average of the log-difference between core goods prices (excludes food and energy) and services prices (series
indexed; 2005 = 100). The US series uses PCE price indices.
Sources: Thomson Reuters Datastream, national sources and Bank calculation.
Globalisation has also led to a dramatic increase in the use of imported intermediates in domestic
production. The ICT revolution has made a great unbundling of production into global value chains possible,
and large wage differentials have made doing so profitable. Intermediate goods trade has represented 80%
of the increase in total trade over the past two decades (Chart 6), driving up the value added of imports as a
share from 10% of exports in 1990 to around 20% in 2015.12
12
See Auer, R, Borio, C and Filardo, A (2017), 'The globalisation of inflation: the growing importance of global value
chains', BIS
Working Paper No. 602.
Chart 6: The development of global value chains has boosted trade in intermediates
Notes: Imports and GDP are in current US dollars.
Sources: Johnson and Noguera (forthcoming), Powell (2016), World Input-Output Database (2016 release) and BIS.
This expansion in global value chains has led to greater synchronisation of producer price inflation across
countries.13 And it has increased the sensitivity of domestic inflation to global inflationary pressures while
reducing its responsiveness to changes in domestic slack.14 Research by the BIS indicates that a doubling
in the share of imported intermediates in GDP causes the importance of global factors for domestic inflation
to double as well.15 Consistent with that, research at the Bank of England indicates that each 1 percentage
point increase in the import intensity of consumption reduces the sensitivity of inflation to domestic slack by 1
per cent, and that the strength of this effect varies with the ease with which producers can switch between
imported intermediates and domestic alternatives.16
Monetary policy makers must take the effects of intermediate trade into account since, unlike commodity
shocks, import price changes take time to work through supply chains into final goods prices and therefore
affect inflation at the policy-relevant horizon.17
Labour markets provide a third channel through which globalisation affects domestic inflation. To be clear,
-
globalisation is far from the only factor that has been affecting labour markets in recent decades and
13
Auer, R, Levchenko, A and Sauré, P (2017), 'International inflation spillovers through input linkages', NBER Working Paper No.
23246. A shock that raises inflation by 1 percentage point in the rest of the world is found to raise domestic producer price inflation by
(PPI) 0.2pp on average across the countries in the sample. The size of the effect varies significantly across countries, however; the UK
is a little below average.
14
This depends, of course, on whether the good/service in the supply chain is sold on to become a final good/service in the same
country or exported.
15
This is true both across countries and over time. See Auer, R, Borio, C and Filardo, A (2017), ibid.
16
See Cesa-Bianchi, A, Kindberg-Hanlon, G, Nelson, B and Thwaites, G, Bank of England, forthcoming. The speed at which changes
in import prices are passed through to final goods is likely to differ across products. For example, for the UK, consumer food and
energy prices appear to respond more quickly than the prices of other goods and services. In part, that appears to be because margins
at each point in the supply chain are tight. For food, it also partly reflects the fact some imported food is already the final consumption
-
good i.e. the supply chain is short.
17
See Goldberg, L and Campa, J (2010), 'The sensitivity of the CPI to exchange rates: distribution margins, imported inputs,
and trade
exposure', The Review of Economics and Statistics, Vol. 92, Issue 2, pages
392-407.
arguably, as work by the IMF and others has shown,18 technological progress has played a more significant
role. Technology, not globalisation, is estimated to be the main reason why labour's share of income has
been falling across advanced economies.
But that does not mean global effects are absent.
The doubling of the effective global labour pool represents a huge, positive supply shock for the global
economy. It has encouraged the shift of the production of goods and services that use lower-skilled labour
-
intensively to countries with an abundance of lower-skilled workers predominantly emerging market
-
economies while production of goods and services requiring more highly skilled labour has concentrated in
-
countries with a greater share of higher skilled labour predominantly advanced economies. The growing
ability to split production components and tasks through global value chains has amplified this effect.19
Globalisation has also increased the contestability of labour markets, weakening the extent to which slack in
domestic labour markets influences domestic inflationary pressures.20 That is, the increased ease with which
activities can be off-shored or domestic vacancies filled by sourcing workers from abroad may have reduced
the relative bargaining power and wage expectations of workers. While it is difficult to measure precisely,
available evidence suggests that contestability effects could be significant.21 Greater openness appears to
have reduced the sensitivity of wages to domestic labour market conditions22 and led to growth in domestic
unit labour costs (ULCs) becoming more closely tied to global ULC growth.23
Overall, the greater global supply of labour has lowered the relative wages of lower-skilled workers in
advanced economies. While this reduces inflationary pressures in the economy as a whole it has
contributed to a long and painful period of adjustment for lower-skilled workers.24 The secular disinflationary
effects from this steady integration of additional workers into the global labour market need to be taken into
account in addition to the cyclical inflationary pressures from changes in labour market slack.
The various channels through which globalisation affects the relationship between domestic slack and
inflation can be illustrated using the Phillips Curve (Figure 1).
18
See 'Understanding the downward trend in labour income shares', Chapter 3 of IMF WEO April 2017.
19
These effects - an example of factor price equalisation (Samuelson, 1948) - have been well documented for example by Autor, D,
Dorn, D and Hanson, G (2015), 'Untangling Trade and Technology: Evidence from Local Labour Markets', The Economic Journal, Vol.
125, No. 584, pages 621-46. Bank staff analysis, using OECD data, suggests this mechanism has operated widely, with a range of
countries seeing strong growth in non-tradeable employment compensate for declines in sectors most exposed to international labour
substitution.
20
This channel also increases the role of the exchange rate in determining inflationary pressures, since it will affect the home-currency
value of the wage workers from abroad would earn by relocating and therefore their willingness to move.
21
For example, for the US, Blinder, A (2009) 'How many US jobs might be offshorable?'
World Economics Volume 10 Issue 2, estimates
that the potential to offshore service sectors jobs may have lowered wages by up to 14%. Arseneau, D and Leduc, S (2011),
'Threatening to offshore in a search model of the labor market' build contestability into a
two-country model and find it can reduce wages
by up to 5% in the source country.
22
Rotunno, L and Wood, A (2016), 'Wage inequality and skill supplies in a globalised world', Aix-Marseille School of Economics Working
Paper.
23
BIS 87th Annual Report, ibid.
24
As noted above, technological changes have played a greater role in driving down the relative wages of less skilled workers.
Figure 1: Effects of globalisation on the Phillips curve
Changes in external demand will cause a shift along the Phillips Curve, as domestic companies adjust
capacity utilisation in response (1).
The series of positive supply shocks from increased product and labour market integration cause parallel
shifts down in the Phillips Curve (2). These downward shifts will persist as long as integration continues.
This may take a while, not least because the advent of digital platforms may extend these processes to a
much broader range of goods and services markets.25 The domestic economy needs to be run with tighter
spare capacity to accommodate these disinflationary effects.
The increased competitive forces from globalisation (both actual and contestable) have also acted through
product and labour markets to decrease the responsiveness of inflation to domestic slack, flattening the
Phillips Curve slope (3).
Monetary policy must take all these effects into account and, on balance, run the domestic economy with
tighter spare capacity in order to accommodate them.
III. Global Influences on the Stance of Monetary Policy
Just as global factors affect the relationship between domestic slack and inflation, they influence the
monetary policy setting needed to achieve the inflation target. In particular, global integration affects the
transmission mechanism of domestic monetary policy, the degree of spillovers from foreign monetary
policies, and the equilibrium rate of interest itself.
25
If and when global integration stops progressing, this shift down in the Phillips curve would reverse.
For the past thirty years, a number of profound forces in the world economy has pushed down on the level of
world real interest rates by as much as 450 basis points (Charts 7 and 8).26 These forces include the lower
relative price of capital (in part as a consequence of the de-materialising of investment), higher costs of
financial intermediation (due to financial reforms), lower public investment and greater private deleveraging.27
- -
Two other factors demographics and the distribution of income merit particular attention.28
Chart 7: Global long run real interest rates have fallen over the past 30 years
Source: Rachel, L and Smith, T (2015), ibid.
26
Rachel, L and Smith, T (2015), 'Secular drivers of the global real interest rate', Bank of England Working Paper No. 571.
27
It is sometimes claimed that the equilibrium real rate depends on the (expected) rate of growth, but this is an oversimplification. The
See 'Real
entire distribution of growth rates matters: not only the mean, but also the volatility, asymmetry and fatness of the tails.
interest rates and risk', speech by Gertjan Vlieghe at the Society of Business Economists' Annual conference, 15
September 2017.
28
For a discussion of the wider implications of these forces, see 'Debt, Demographics and the Distribution of Income: New
challenges
for monetary policy', speech given by Gertjan Vlieghe at the London School of Economics, 18 January 2016.
Chart 8: Secular drivers pushing down long-run equilibrium real interest rate
Bank research estimates that the increased retirement savings as a result of global population ageing and
longer life expectancy have lowered the global real interest rate by around 140 basis points since 1990 and
they could lead to a further 35 basis point fall by 2025.29 The crucial point is that these effects should persist
after the demographic trends have stabilised because the stock, not the flow, of savings is what matters.30
By changing the distribution of income, the global integration of labour markets may also lower global R*.
The changes in relative wages in advanced economies have shifted income towards skilled workers, who
have a relatively higher propensity to save. Rising incomes in emerging market economies may be
reinforcing that effect as saving rates are structurally higher in emerging market economies, reflecting a
variety of factors including different social safety regimes.31
The high mobility of capital across borders means that returns to capital will move closely together across
countries, with any marked divergences arbitraged.32
As a consequence, global factors are the main drivers of domestic long-run real rates at both high and low
frequencies (Charts 9 and 10). For example, Bank of England analysis suggests that about 75% of the
29
Lisack, N, Sajedi, R and Thwaites, G, 'Demographics and the real interest rate', forthcoming.
30
Although retirees dis-save, they also tend to retain relatively high wealth during their retirement, so as the share of the population in
retirement increases the stock of savings will remain elevated even as the flow of savings falls.
31
As Ben Bernanke noted, a 'savings glut' from emerging economies developed in the to the crisis (see remarks on 'The Global
run-up
10 March 2005). Global labour market integration could also have lowered the
saving glut and the US current account deficit',
equilibrium real interest rate because households in EMEs are relatively risk averse, and this has increased global risk aversion as
Hall, R.E. (2016), 'The role of the growth of
wealth has shifted from AEs to EMEs; see risk-averse wealth in the decline of the safe real
interest rate, NBER Working Paper No.22196.
32
-
Of course, various frictions to complete capital mobility including home bias, borrowing constraints because securities are imperfect
-
substitutes and incomplete risk sharing across countries will yield some divergence.
movement in UK long-run equilibrium rates is driven by global factors (Chart 10).33 Estimates by economists
at the Federal Reserve deliver similar results (Chart 11).34
Chart 9: Close co-movement of long-run interest rates at high frequency...
Notes: 10-year real bond yields derived from inflation swaps.
Sources: Bloomberg and Bank calculations.
...and
Chart 10: at low frequency
Notes: UK long-run equilibrium real interest rate and fitted values obtained from simple regression on US long-run equilibrium real
interest rate.
Sources: Bloomberg and Bank calculations.
33
in Mueller, U and Watson, M (2015),
Applying the recently-developed technique for estimating low-frequency co-movement
NBER Working Paper No. 21564,'using data since the 1950s.
'Lowfrequency econometrics',
34
Holston, K, Laubach, T and Williams, JC (2016), 'Measuring the natural rate of interest: International trends and determinants',
Journal of International Economics, Vol. 108, Supplement 1, pages S59-S75.
Chart 11: Majority of long-horizon variation in UK equilibrium rates explained by international factors
Notes: Forecast error variance decomposition from a vector error correction model, share not explained by domestic R*.
Sources: Holston, K, Laubach, T and Williams, JC (2016), ibid.
Global factors also influence domestic financial conditions and therefore the effective stance relative to the
shorter-term equilibrium rate of monetary policy, r*.
The presence of borrowers and lenders operating in multiple currencies and in multiple countries creates
multiple channels through which developments in financial conditions can be transmitted across countries.35
For example, changes in sentiment and risk aversion can lead to international co-movement in term premia,
affecting collateral valuations and so borrowing conditions.
Work by researchers at the Bank of England, building on analysis by the IMF,36 shows that a single global
factor accounts for more than 40% of the variation in domestic financial conditions across advanced
For the UK, which hosts the world's leading global financial centre, the relationship is
economies. much
tighter, at 70%.
Highlighting the openness of the UK economy and financial system, a third of the business-cycle variation in
the UK policy rate can be attributed to shocks that originate abroad.37
One important channel of global spillovers is of course monetary policy. In coming years, it is reasonable to
expect global term premia to rise as net asset purchases could shift significantly from the situation during the
past four years when all net issuance within the G4 was effectively absorbed (Table 1).
35
Hélène Rey has been a key proponent of the importance of such channels. See, for example, Miranda-Agrippino, S and Rey, H
(2015), 'World asset markets and the global financial crisis', NBER Working Paper No. 21722.
36
IMF Global Financial Stability Report 2017, Chapter 3.
37
A and Sokol, A 'The international credit channel of US monetary policy and credit shocks', forthcoming.
Cesa-Bianchi,
Table 1: G4 net asset issuance still low in 2017
$bn 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Asset
-61 1756 451 670 642 1756 1254 1312 1799 1338
purchases
Bond
2936 2664 3534 2486 2263 1753 1525 1093 1286 1527
issuance
Net
2997 908 3083 1816 1622 -3 270 -219 -513 189
issuance
Notes: G4 here are the UK, EA, US and Japan. Bond issuance refers to annual changes in the stock of the general government debt.
Agency debt is also included for the US. Asset purchases refer to total amount of bonds purchased by the central banks. Annual asset
purchases are obtained by summing net monthly purchases over corresponding 12 months. Monthly flows are converted into US dollars
by using an average monthly exchange rate. Sources: ECB, Bank of England, Federal Reserve, Bank of Japan, SIFMA, Thomson
Reuters Datastream and Bank calculations.
The Fed's widely trailed intention to reduce gradually its holdings of US Treasuries could ultimately have
significant effects on financial conditions globally. Although the precise degree and timing of this effect are
subject to considerable uncertainty, the direction is clear: reducing the stock of purchased assets should
increase the term premium for US treasuries (due to both portfolio balance and signalling effects). Fed staff
recently estimated that balance sheet normalisation could ultimately lead to a 75 basis point rise in the 10-
year term premium.38 According to the July Primary Dealer Survey, the median expected rise in the 10-year
US Treasury yield over the next two years due to a reduction in the balance sheet is around 30 bps (with an
interquartile range of 20-50bps). Whatever happens, Bank analysis suggests that around two-thirds of
changes in US term premia will spill over into the UK over time.39
IV. Should the Monetary Policy Framework be adjusted?
In summary, global demand has become more important for pressures on domestic capacity (i.e. movements
-
along the Phillips Curve) and global integration along all dimensions labour, final goods and services, and
intermediates - acts as a series of positive supply shocks that impart sustained disinflationary pressures (i.e.
shifting the Phillips Curve downwards and flattening it).
And just as global factors affect the relationship between domestic slack and inflation, they have made it
more difficult for central banks to set policy in order to achieve their objectives. Major secular forces have
lowered the equilibrium rate of interest, meaning that central banks have had to use unconventional tools in
central banks'
order to provide stimulus. At the same time, open and integrated markets have reduced
control over their domestic financial conditions.
In the wake of such disinflationary challenges some have argued that monetary policy frameworks should be
overhauled. For example, Claudio Borio recently suggested that the secular disinflationary effects from
continued global integration could dominate increased cyclical inflationary pressures from a smaller global
38
Bonis, B, Ihrig, J and Wei, M (2017). 'The Effect of the Federal Reserve's Securities Holdings on Interest Rates' FEDS
Longer-term
Notes. Washington: Board of Governors of the Federal Reserve System, 20 April 2017.
39
This analysis uses the IMF's Flexible System of Global Models, a
semi-structural model of the global economy that captures
international trade and financial linkages.
output gap as the recovery progresses.40 In keeping with BIS traditions, Borio encourages central banks to
lean into the wind, accepting lower inflation outcomes, for both macroprudential reasons and to
accommodate the positive global supply shock.41
In my view, the bar for changing monetary policy frameworks should be very high. Consider the Bank of
England. We have a wide range of macroprudential tools that allow monetary policy to be the last line of
defence against financial stability risks. Our monetary policy remit from HM Government gives the MPC the
necessary constrained discretion to respond flexibly to real shocks, including from globalisation, while
extent there is "good deflation" from
maintaining the primacy of price stability. More generally, to the
globalisation, it exists in parallel with lingering risks of an old-style, Fisher debt deflation which could be very
bad indeed.
I am also mindful that central banks have generally been able to achieve their objectives and that, with the
strengthening and broadening global expansion, cyclical forces should ease constraints on central banks. In
addition, as demand in a number of major economies rotates from consumption towards investment42 (Chart
12) and as fiscal policies become less contractionary,43 short-term equilibrium real interest rates should rise
everywhere. This means that a static monetary policy stance becomes more expansionary all else equal.
Chart 12: Strong capital goods orders point to demand rotating towards investment
Sources: Sources: Thomson Reuters Datastream and Bank calculation.
40
Borio, Presentation on the BIS 87th Annual Report, ibid.
41
Some have argued that inflation targets should be raised. The claimed benefits from doing so may rely excessively on the
relationship between the inflation target and inflation expectations in a deflationary environment and in proximity to the lower bound on
interest rates.
42
The contribution of investment to world GDP growth has picked up to 0.7pp in 2017 Q1 from an average of 0.3pp during 2016 /
Investment has contributed 70% to the pickup in world GDP growth between 2016 Q1-Q3 and 2016 Q4-2017 Q2.
43
The global fiscal structural balance narrowed by 2.5% of world GDP between 2010 and 2014 but has widened by around 0.5% since
then.
That said, I wo