. s. spending has risen, the pass - through of exchange rates into import prices has declined. however, we do not know whether the decline in pass - through is merely transitory or will be sustained. achieving price stability. the resulting increased focus on price stability has been a key reason for the reduction of inflation worldwide. conclusion the increasing integration of global product, labor, and financial markets has the potential to significantly alter the behavior of the economy, a development that could complicate the task of monetary policy. in practice, however, the behavior of the u. s. and global economies does not appear to have radically changed in recent years. the federal reserve and other central banks retain the ability to stabilize prices and output. nonetheless, central bankers must continue to monitor the evolution of the economy and the changes that may result from the ongoing globalization process. references ball, laurence m. ( 2006 ). " has globalization changed inflation? " nber working paper series 12687. cambridge, mass. : national bureau of economic research, november, www. nber. org / papers. barro, robert j., and david b. gordon ( 1983 ). " rules, discretion, and reputation in a model of monetary policy ", journal of monetary economics, vol. 12 ( no. 1 ), pp. 101 - 22. bergin, paul r., robert c. feenstra, and gordon hanson ( 2007 ). " outsourcing and volatility ( 184 kb pdf ) ", paper presented at the conference on globalization and the macroeconomy, european central bank, july 23 - 24, www. ecb. int / events / conferences / html / global _ macro. en. html. borio, claudio e. v., and andrew filardo ( 2007 ). " globalisation and inflation : new crosscountry evidence on the global determinants of domestic inflation ", bis working paper 227. basel : bank for international settlements, may, www. bis. org / forum / research. htm. chen, natalie, jean imbs, and andrew scott ( 2007 ). " the dynamics of trade and competition ( 556 kb pdf ) ", paper presented at the conference on globalization and the macroeconomy, european central bank, july 23 - 24, www. ecb. int / events / conferences / html / global _ macro. en. html. ehrmann, michael, marcel fra

term is not significant. are foreign output gaps playing a more prominent role in the domestic inflation process, so that domestic monetary policy has more difficulty stabilizing inflation? as economies have become more open, foreign factors may have become more important in the determination of domestic inflation. research at the bank for international settlements ( borio and filardo, 2007 ) seems to provide evidence that foreign resource slack has superseded domestic slack as a key determinant of domestic inflation. however, research at the federal reserve board ( ihrig and others, 2007 ) and at the oecd ( pain, koske, and sollie, 2006 ) point out that the specification of the phillips curve in borio and filardo ( 2007 ) is problematic. their key findings are not robust to alternative specifications. moreover, their specification leads to econometric difficulties because it causes serial correlation of the residuals that is not corrected for. using more - conventional specifications of phillips curves, the research at the federal reserve board ( ihrig and others, 2007 ) and the oecd ( pain, koske, and sollie, 2006 ), as well as ball ( 2006 ), finds that foreign output gaps are not important determinants of domestic inflation. however, foreign factors could more plausibly play a role in the inflation process through import prices. as economies become more open and imports play a bigger role in the economy, consumer prices may become more sensitive to import prices. indeed, cpi inflation does appear to have become more sensitive to import prices over time, both in the united states and in other oecd countries ( pain, koske, and sollie, 2006 ). 3 can domestic monetary policy still control domestic interest rates and so stabilize both inflation and output? in principle, the increasing global integration of financial markets, by reducing the scope for individual central banks to control domestic interest rates, could hamper the ability of monetary policy to stabilize prices and economic activity. indeed, some evidence appears to suggest that foreign factors influence interest rates ; for example, the global saving glut does seem to have led to somewhat lower long - term interest rates by reducing term premiums ( warnock and warnock, 2006 ). more generally, research points to important linkages between u. s. and foreign interest rates and other asset prices ( ehrmann, fratzscher and rigobon, 2005 ; faust and others, 2007 ). however, central banks still retain the ability