While labour supply in these countries will remain abundant, it is not all that clear whether it will remain cheap. Indeed, we are currently seeing  1  Speech by Charles Bean, “Globalisation and Inflation”, to the LSE Economic Society, 24 October 2006. BIS Review 103/2007  1  an increase in export prices in emerging countries, which translates into higher import prices for developed economies. This inflationary impact seems to have grown over the past few years, while, by contrast, the disinflationary impact of globalisation seems to have slowed down. Going further, some analysts have suggested that, because of capital market integration, real interest rates will equalize around the world, thus reducing the ability of national Central Banks to control inflation. However, this need not be true. Indeed, the classic MundellFleming analysis concludes that monetary policy should be more effective, rather than less, in the case of international capital mobility, although it can operate through different channels of transmission including the exchange rate. But inflation is more than the direct result of macroeconomic shocks. It is a process in which business cycles as well as expectations play an important role. Has this process changed? A change in the output – inflation trade-off? Inflation dynamics have changed over the past fifteen years or so. Inflation persistence has declined, or, in other words, upward changes in the path of prices have become more temporary and easily reversed. Also, inflation itself has become less responsive to shocks. Both are very welcome developments for monetary policy.

Of course, monetary policy does not react mechanically to monetary developments, but rather responds to the information in monetary aggregates that is relevant for maintaining price stability over the medium term. To make best use of the informational role of money, however, we have to address numerous and increasing challenges. 3  It is worth noting that not everybody is convinced that globalisation has played an important role in the flattening of the Phillips curve. For instance, Frederic Mishkin, Axel Weber and Donald Kohn emphasize the uncertainty surrounding the quantification of this globalisation effect, and Laurence Ball even questions this effect on theoretical grounds. Part of these doubts comes from the apparent lack of robustness of the result indicating that domestic inflation has become more sensitive to global output-gap fluctuations, which tends to weaken the case for the globalisation explanation of the flattening of the Phillips curve. 4  Benati L. (2007), “Long-run evidence on money growth and inflation”, forthcoming in the ECB Working Paper Series. BIS Review 103/2007  3  One major difficulty is identifying in real time the nature of monetary developments and their implications for future price developments. The challenge of monetary analysis is to see through the noise in monetary data to recover those underlying trends which are relevant for monetary policy decisions. Meeting this challenge has not been straightforward in recent years in the euro area. First of all, short-run monetary developments are often affected by transitory shocks.