Axel A Weber: Central banks and globalisation
Introduction by Professor Axel A Weber, President of the Deutsche Bundesbank, to the 10th
Bundesbank Spring Conference (in cooperation with the IMFS), Eltville, 22 May 2008.
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1 Introduction
Ladies and gentlemen, it is a pleasure for me to welcome you to the 10th Bundesbank spring
conference, which has been organised in cooperation with the Institute for Monetary and
Financial Stability (IMFS). And for those who have never been to our training centre before -
welcome to our facilities here! I am sure you will like this location, not least because of its
direct proximity to the Rhine and the picturesque town centre of Eltville.
The title of this spring conference is "Central Banks and Globalisation". With regard to
globalisation, I think it is quite justified to say that this term has been a key economic topic
over the past ten years - and I don't think this is going to change in the foreseeable future.
Why is this so? Nowadays, there is almost no economic phenomenon that is not influenced -
at least to a certain extent - by what we call "globalisation". "Globalisation" seems to be
everywhere - a search on Google yields more than 25 million hits.
Evidently, the process of globalisation has many different historical, political, social, and
economic facets. Some of the economic facets - in particular, those that are of interest to
central banks - are going to be covered over the course of the next two days, as highlighted
in the conference programme. When looking at this programme, I am very pleased to see
that - once again - we have been able to bring together many distinguished participants who
are going to present the results of their recent research on globalisation-related issues. I
hope or, more specifically, I am pretty sure that this conference will generate useful insights
and that it will lead to a productive exchange of ideas and views among the participants.
In my remarks over the next 15 minutes or so, I shall cover some issues related to
globalisation which are of particular importance to central bank policymakers. Therefore,
after highlighting some basic characteristics with respect to globalisation, I shall focus on
globalisation and inflation, leaving aside the important and interesting issue of globalisation
and monetary policy.
In this context, the fundamental question is whether globalisation has altered the setting for
central banks, in particular with a view to delivering price stability. My basic conclusion will be
that globalisation has not changed the rules of the game for stability-oriented central banks.
2 Globalisation: basic characteristics
To start off, let me briefly restate some basic observations with respect to globalisation.
Notwithstanding the widespread use of the term "globalisation", there is neither a single
definition of what globalisation actually means nor a single key figure for measuring its scale
and evolution over time.
In my view, a useful working definition of the term "globalisation" is that, quite fundamentally,
it describes the ongoing process of the international division of labour. In the wake of this
process, the domestic markets for goods and services, as well as the labour markets, are
becoming more and more interlinked and interdependent internationally.
The process of globalisation has been evolving among developed countries for many
decades now. Therefore, in contrast to what some observers might think, the current process
of globalisation per se is neither new nor particularly unique. Rather, it is the logical outcome
of efforts to further exploit the benefits of the division of labour on an international scale.
However, the pace of this process has been increasing rapidly for more than a decade now.
Declining costs of telecommunication and transportation have been the main drivers of this
development. There have, moreover, been considerable improvements in skill levels in many
regions of the world as well as in the product quality of goods and services that are produced
in formerly rather underdeveloped countries. Additionally, what has changed the face of
globalisation is the fact that globalisation nowadays extends to a larger group of countries
than in the past.
More and more countries which used to have rather closed economies have opened
themselves to the world market. Thus, new players have entered on to the global stage and
are becoming increasingly relevant economic powers and, as a result, competitors to
established developed countries.
As a consequence, the process of globalisation is leading to a shift in weights in the global
economy. This shift is nothing exceptional. In fact, it is a quite natural development, which
simply reflects the continuously evolving global economic landscape. Let me now come to
the subject of globalisation and inflation.
3 Globalisation and inflation
Speaking on globalisation and monetary policy at the current juncture, I feel tempted to refer
to the famous song by Bob Dylan "The times they are a-changin'". One verse has several
great lines of advice for economists:
Come writers and critics
Who prophesize with your pen
.....................
And don't speak too soon
For the wheel's still in spin
.........................
The loser now
Will be later to win
For the times they are a-changin'.
It is only some months ago that a lot of writers and critics "prophesized" that, in an era of
globalisation, inflation is, and should not be, a cause for concern among monetary
policymakers. With the benefit of hindsight, though, they should have followed Bob Dylan's
advice: "But don't speak too soon, for the wheel is still in spin", as inflation has reappeared on a
global scale.
Moreover, in the face of the global financial turbulence of the past months, the debate in the
media has switched from being about a "goldilocks environment" to the inherent risks of
entering a period of perceived stagflation.
Considering that "the times they are a-changin'", as Bob Dylan put it, a medium- to
longerterm perspective is of the essence. Taking such a medium-term view, I have always been
one of the sceptics with regard to the "globalisation = low inflation"-paradigm, notwithstanding
the fact that the notion of "more globalisation equals lower inflation" is shared by many
observers - or was, at least, shared by them until a few months ago.
What is the underlying reason for this widespread assumption? Evidently, since the
beginning of the 1990s, the ongoing advance of globalisation has coincided with a marked
decline in inflation rates and inflation volatility worldwide. It is not surprising that a causal
interpretation has been given to these parallel developments with increased globalisation
being seen as the agent that has driven down inflation rates. And, indeed, over the past ten
years, price rises in manufacturing imports in the euro area have been rather subdued, thus
dampening - other things being equal - the increase in the overall consumer price index.
At first sight, this seems to support the view of "opportunistic disinflation" according to which
globalisation has been a key factor in lowering inflation rates. However, the past few months,
in particular, have shown that there are obvious reasons why many observers should have
been more cautious before drawing such conclusions.
In fact, globalisation does not necessarily only have a dampening effect on inflation. To the
contrary, the opposite might be the case as well; globalisation might be a major driver of
inflationary pressures.
The reason for this is as follows: Increasing international competition, which is an element of
today's globalised world and tends to dampen inflationary pressure, cannot be separated
from the globalisation related inflationary effect of higher energy and commodity prices. Both
developments are driven by the same force, namely the integration of more and more
countries into the world economy. Hence, both developments are the two sides of the same
"globalisation coin". Put differently: If one thinks about the price effects of globalisation, one
should not only consider declining prices of textiles and electronics, but also bear in mind
higher fuel and heating invoices.
It is difficult to estimate the net effect of these various terms-of-trade shocks on the overall
price level in industrial countries. But, in my view, there is no reason to assume that the
overall outcome has been one of a more benign inflation outlook.
Not least with this in mind, I have - as I mentioned earlier - always been quite sceptical
about whether the story of globalisation adequately captures the aspects that are most
important for explaining the decline in inflation rates. It is monetary policy that, over the
medium to long term, pins down trend inflation. Central bankers ultimately have to do their
job to deliver price stability.
The decline in trend inflation worldwide is therefore better explained by monetary policy in
many countries being geared to price stability, which is enhanced by the increasing
independence of central banks in achieving their goals.
Let me conclude as follows: In contrast to what was a widespread notion until a few months
ago, there are no signs that globalisation has led to a more benign inflationary environment
for central banks. In particular, in the current setting of heightened price pressure due to food
and energy price increases, it is becoming obvious that globalisation does not necessarily
produce tailwinds for a stability-oriented monetary policy. In fact, "headwinds induced by
globalisation" are a better description of the drivers of today's inflationary pressures.
Thus, globalisation by no means reduces the need for a stability-oriented domestic monetary
policy which is robust enough to deal with an ever-evolving environment. Generally, it is
monetary policy that determines inflation in the medium to long run.
The fact that this idea has now become accepted in more and more countries worldwide is
the key factor in explaining the global decline in inflation rates we have been observing over
the past decades.