##bles in an open economy. but the overall level and dynamics of prices ultimately remain determined by the monetary authorities provided they ensure that steady growth in overall nominal demand is maintained through an appropriate monetary policy. 1 in addition, it is possible that the effects of globalisation on inflation will be reversed in the future. strong growth in big emerging economies is increasingly putting pressures on the price of oil, food and other commodities. 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 speech by charles bean, “ globalisation and inflation ”, to the lse economic society, 24 october 2006. 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. maybe the most documented and commented - upon change in inflation dynamics has been the so - called flattening of the phillips curve. this, in economists'jargon, means that domestic inflation has become less sensitive to the domestic output - gap ; or, alternatively, that it has become more stable during the business cycle. there are several possible – and not mutually exclusive – explanations for this phenomenon. it may well be that expectations of future inflation have become a more important determinant of current inflation at the expense of the current output gap, which would signal that monetary policies have become more effective in

has expanded in recent years through numerous programmes ( app, pepp, tltros,.. ) and is now just short of 9 trillion euros. it would not be consistent to keep a very large balance - sheet for too long in order to compress the term premium, whilst at the same time contemplating tightening policy rates above neutral. in addition, rising remuneration on very large excess reserves may alter the transmission of the desired tightening through the bank channel. but obviously, this question is less pressing than the rise of interest rates to neutral, and should come only at a later stage. let me simply put forward at this stage a few preliminary principles that could in my personal view guide the normalisation of our balance sheet, in due time : first, our key interest rate should remain our primary instrument to adjust our monetary policy stance. the size of our balance sheet should be used as a complementary policy tool, whose effects are more difficult to calibrate or finetune. page 11 sur 14 second, we should follow a clear sequencing regarding the various programmes : ( i ) the reimbursement of tltros comes first, and we should avoid any unintended incentives to delay repayments by banks ( ii ) at the other end, pepp should be reinvested until the end of 2024, as stated ( iii ) this leaves inbetween app for which the governing council has said that reinvestment will continue in full until “ well past the date when it started raising the key ecb interest rates ”. here we could start earlier than 2024, maintaining partial reinvestments but at a gradually reduced pace. third, the phasing out of the asset portfolio should be orderly, announced cautiously and well in advance. the ‘ stock effect ’ of asset holdings, which is the key transmission channel, primarily depends upon the expected end - point of the balance sheet normalisation, in terms of both the terminal date and size. fluctuations in the pace of the run - off during the travel to destination do matter less. fourth, as taught by us experience in 2017 - 2019, the pace of the balance sheet reduction should not be left completely on “ automatic pilot ”. starting slowly, assessing markets reaction, and gradually accelerating seems like a sound approach. some flexibility should be kept, in case of sudden liquidity shocks. indeed, the ‘ flow effect ’ may temporarily play a role when market liquidity abruptly dries up. iii. a sensitive co