In the context of rapid liquidity expansion, asset prices may overshoot, leading to potentially costly boom bust cycles, the misallocation of resources and pressures on price developments. In this respect, ECB research has also shown that monetary liquidity shocks have played a role in driving asset prices during the boom phase of asset price cycles. However, the issue of empirical causality between asset prices and portfolio allocation, on the one hand, and money and credit developments, on the other, remains a subject of ongoing research. A full understanding of the dynamics and forces behind global monetary liquidity is important for providing insights into the various transmission channels through which liquidity can affect the global business cycle, asset prices and global inflation. In the current context, if global economic growth and global liquidity are likely explanations for the recent increase in commodity prices, the resulting inflationary pressures should not necessarily be dismissed as “non-core”. The long-run impact of global commodity price pressures on inflation will depend on whether they reflect a temporary shock or a more persistent nominal trend, driven partly by ample global liquidity. Overall, when looking at the major OECD economies, consumer price inflation has been successfully contained for quite some time now. However, for the euro area at least, the information available at the current juncture – not least the monetary data at both the areawide and global levels – points to upside risks to price stability. Let me now address the second issue I raised earlier.

The growing size of international capital flows associated with globalisation of financial markets has made the analysis of monetary aggregates, for the purpose of extracting information for assessing price stability, increasingly more complex. BIS Review 149/2007  3  This brings me to discuss the third point: the implications of globalisation and of international capital flows for monetary policy. If globalisation and, specifically, cross-border capital flows can affect the dynamics of monetary aggregates, how can we conduct monetary policy? An improved shared understanding of the influence of global liquidity and cross-border capital flows on the monetary policy transmission mechanism is necessary to enhance the analysis underlying our decisions. Our role and responsibilities as central bankers remain intact in the globalised economy, but the performance of our task may be becoming more challenging. Certainly, there is a need for timely and open exchange of information among central banks and for further collaborative research efforts. Still, let me stress that the globalisation of financial markets does not affect the central role and overriding responsibility of central banks, which is to preserve price stability within their respective jurisdictions. Central banks throughout the world have been assigned responsibility for keeping domestic inflation at low and stable rates. Cross-border capital flows may affect the velocity of money, but the basic principle for anchoring monetary policy – that is the Friedman’s view that “…in the long run, inflation is always and everywhere a monetary phenomenon” – remains valid.