Christian Noyer: Opening address, "Globalisation, Inflation and Monetary
Policy" Symposium
Opening address by Mr Christian Noyer, Governor of the Bank of France, at the International
Symposium on "Globalisation, Inflation and Monetary Policy", organised by the Bank of
France, Paris, 7 March 2008.
* * *
I am delighted to open this 5th international symposium of the Banque de France, which is
an opportunity to bring together heads of central banks and international institutions, leading
academics and directors of private banks, as well as representatives of industrialised and
emerging countries, in order to address a topical issue of common interest and concern to us
all. Today's debate will be rich and intense. The first session, chaired by Jean-Claude
Trichet, President of the European Central Bank, will present the main concepts and stylised
facts of globalisation and world inflation. The second session, chaired by Jean-Pierre Roth,
President of the Swiss National Bank, will focus on the links between globalisation and the
determinants of domestic inflation. The third session, which will take the form of a round table
chaired by Nout Wellink, Governor of the Nederlandsche Bank, will examine the impact of
financial globalisation on growth and asset prices. Lastly, the fourth session, chaired by
Guillermo Ortiz, Governor of the Bank of Mexico, will assess the implications for the conduct
of monetary policy. Jacob Frenkel has agreed to take on the difficult task of making the
concluding remarks for this symposium. Jacob, like a number of others here today,
epitomises the diversity of the origins of the participants in this symposium since he has
served on the faculty of the University of Chicago, was the Economic Counselor and Director
of Research at the International Monetary Fund and the former Governor of the Bank of
Israel, and is now the Chairman of the Group of Thirty and Vice Chairman of American
International Group (AIG).
I will now simply make a few brief introductory remarks.
Our colleague Mervyn King often says that monetary policy should be "boring". This is
certainly not the case today. Monetary policy is interesting. But it is also, and above all,
difficult. In many respects, to put it informally, the good times are behind us. Globalisation
has no doubt considerably helped central banks over the past decade. Today, this is less
clear cut.
We are facing a combination of two difficulties.
First, at present, for all countries, the risks for growth are on the downside and for inflation on
the upside. Beyond the diversity of their mandates, this represents a common challenge for
all central banks.
Second, because we are all affected, to differing degrees, by the turmoil of the past eight
months in the credit markets. In the coming hours we shall hold an in-depth debate on the
relationship between financial stability and price stability. But I believe that we will all agree
that the conduct of monetary policy is more difficult and more uncertain in a less stable and
more volatile financial environment.
I would briefly like to develop these two points.
The past two decades have been characterised, on the one hand, by an increasing
integration at the global level of goods, services and capital markets and, on the other, by a
reduction in inflation that has stabilised at low levels. Given the coexistence of these two
phenomena, a number of observers have concluded that there appears to be a causal link.
Where exactly do we stand today?
For over ten years, with the growing integration of our economies in the past few decades,
powerful forces, throughout the world, have been acting to enhance price stability. Each
year, the arrival of tens of millions of people on the world market increases global production
capacity, in particular for tradable goods. For monetary policy in developed countries, this
process is equivalent to a sequence of positive supply shocks that take the form of a
spontaneous decline in the import prices of manufactured goods. All other things being
equal, this terms-of-trade gain allows for a lower inflation rate for a given capacity utilisation
rate. More fundamentally, and although things seem to be less straightforward in this area, it
is possible that the increasing openness of our economies may have structurally changed the
wage and cost formation process in a manner that favours price stability. Heightened
competition triggered by imports reduces the market power of firms at the national level.
However, other more indirect effects are also detectable. According to studies carried out at
the Banque de France1, the disinflationary impact of imports appears to be relatively
independent of import volumes: the mere existence of potential competition renders the
markets, in the words of experts, more "contestable" and influences behavioural patterns.
These disinflationary forces are still present. However, there are now other more powerful
forces that have the opposite effect. The growth of emerging market economies and the rise
in the living standards of their populations are leading to a surge in the demand for natural
resources, food and energy, which logically has a strong and permanent impact on inflation.
Furthermore, by strengthening the magnitude of global shocks in relation to more specifically
domestic shocks and favouring the international transmission of the latter, globalisation
introduces a much greater synchronisation of inflationary cycles between countries, with the
ensuing risks of amplification.
Overall, the effects of globalisation have ceased - probably in the long term - to be
spontaneously disinflationary.
The second topic that I wish to discuss concerns globalisation and financial innovation.
There is, in my mind, no doubt about the long-term benefits of the financial innovation
process that we have been witnessing over the past twenty years. However, we can also see
that it may be accompanied by cyclical developments and structural changes that could
potentially prove to be disruptive for monetary policy. Monetary and financial conditions are
simultaneously influenced by central bank decisions, but are also increasingly affected by
sometimes exogenous trends in asset prices and the pricing of risk. The monetary policy
transmission mechanism is more fraught with uncertainty and less "linear" than it used to be,
as shocks on asset and risk prices introduce discontinuity into financing conditions.
These developments underscore two interesting issues in particular that I would like to briefly
consider.
The first concerns monetary policy responses. It will have escaped nobody's attention that
these responses are not identical across all countries. In my view, this reflects different
situations more than divergent approaches. All of the world's economies are not affected in
the same way by property market shocks or developments on credit markets. In particular,
we can observe that the distribution of credit remains very dynamic in Europe and that, in
most euro area countries, property markets remain relatively stable.
More fundamentally, it seems to me that developments in the economic and financial context
of globalisation bear out and reinforce the importance given to what, in Eurosystem parlance,
we call monetary analysis, i.e. the examination and analysis of the main monetary and
financial aggregates. We derive three major benefits from our monetary pillar. First, it favours
the anchoring of long-term inflation expectations, which is essential when, as is currently the
case, instantaneous pressures are strong. Second, it constitutes an integrated framework for
the analysis of financial and monetary developments, which is particularly useful in times of
structural change and turmoil on credit markets. Lastly, it is an indicator of underlying
inflationary pressures - something that is indisputably necessary.
It is possible, indeed, that globalisation reduces the sensitivity of inflation to domestic
demand owing to the possibility of increased use of external supply. This leads to a degree of
decoupling of the capacity utilisation rate and the level of inflation. Under these
circumstances, Phillips curves flatten and the monitoring of instantaneous inflation is no
longer sufficient to detect underlying pressures. Monetary analysis therefore provides an
indispensable insight into inflation developments.
The second issue concerns future developments in the world financial system. We are
honoured to have among us today high-ranking policymakers and experts from both
socalled industrialised countries and emerging economies. It seems clear that not everyone
shares the same vision or the same approach to the processes of liberalisation and financial
innovation. Yet our economies are increasingly interdependent and our financial markets
ever more interconnected. It seems that the time has come to ask how, in the future, financial
systems organised and regulated on such different bases and principles can co-exist, and
what the systemic and macroeconomic consequences of this diversity will be. At a time when
we are all reflecting on the role and future of the International Monetary Fund, this, it seems
to me, is a major challenge that could be taken up by this institution.
It remains, Ladies and Gentlemen, for me to hope that this symposium gives rise to fruitful
exchanges and a deeper understanding of the links between globalisation, inflation and
monetary policy. I wish you an enjoyable and productive day, and give the floor to President
Jean-Claude Trichet.