speech globalisation and monetary policy speech by philip r. lane, member of the executive board of the ecb, at the university of california los angeles, 30 september 2019 it is a pleasure to contribute to ucla ’ s master of applied economics distinguished speaker series. los angeles is a good setting for me to reflect upon the importance of globalisation : around usd 300 billion of us imports and exports pass through the port here every year – around half of which are to or from china – while californian firms are at the forefront of many global industries. [ 2 ] globalisation has fundamentally reshaped how the major advanced economies operate ( including both the euro area and the united states ). the rest of the world is a major destination for the goods and services these design and produce, while providing a broad choice of imports for domestic producers and consumers. alongside this, the financial systems of the advanced economies have been transformed through global financial flows, while the technological frontier is driven by the global pace of innovation. it directly follows that central banks must take into account the impact of globalisation on both macrofinancial dynamics and the transmission mechanisms through which monetary policy operates. accordingly, my aim in this lecture is to analyse some dimensions of how globalisation affects the monetary policy of the ecb. to set the scene, i will first review some key indicators of globalisation. i will then outline how globalisation can be incorporated into the conceptual frameworks that we employ to think about monetary policy. and finally, in order to make a direct link between the topic of globalisation and the current conduct of monetary policy, i will discuss the role of external factors in the current slowdown in the euro area. the evolution of financial and economic globalisation a fundamental shift in the global economy has been the increasing share of emerging and developing countries in world gdp, which has characterised the past two decades ( chart 1 ). mechanically, it reflects the higher growth potential of economies that are catching up with advanced economies by closing the technology gap, improving institutional capacity and fostering the accumulation of physical and human capital. and, in the aggregate, faster population growth has also played an important role. emerging and developing countries were also somewhat less exposed to the excessive leverage and risk - taking that was at the root of the 2008 - 09 global financial crisis, and their resilience during that period ( which also reflected countercyclical fiscal and monetary policy ) resulted in a further upward shift in their relative share in global output and

] as a result, many large and complex financial institutions appear to have benefited from cheap funding, thanks to such too - big - to - fail expectations. 9 cheap funding which is insensitive to balance sheet risks may easily spur risk - taking, especially when banking competition gets tougher. sheer ignorance by bank managements of the true risks may also have played a role. 10 [ slide 9 – market discipline vs. structure of banks – a “ chicken - and - egg ” problem to be solved ] the too - big - to - fail assumption weakened market discipline, as did the opacity of large, complex financial institutions. as a result the banking sector has not been renewed or restructured in a way that might have happened in a world with efficient market discipline. inefficient business models have not been outdated in the same way as they have been done in the corporate sector, where the conglomeration trend of the 1980s reversed already some time ago. the market indications of a diversification discount appear to be too weak. 11 the challenge at hand is thus to implement regulatory reforms and policies which help steer the financial sector and banks towards a size and structure, which in a better way support economic growth while maintaining financial stability. no one really knows what the right size this refers to the era which is known as the great moderation. see e. g. borio ( 2003 ), “ towards a macroprudential framework for financial supervision and regulation? ”, cesifo studies, 49 ( 2 ) and the june 2013 imf - report “ key aspects of macroprudential policy ” on work to be done in the field. davies & tracey ( 2014 ), “ too big to be efficient? the impact of implicit funding subsidies on scale economies in banking ”, journal of money, credit and banking ( forthcoming ). rajan, r. ( 2013 ), a step in the dark : unconventional monetary policy after the crisis. andrew crockett memorial lecture, bis, 23 june 2013. laeven and levine ( 2007 ), “ is there a diversification discount in financial conglomerates? ”, journal of financial economics 85 ( 2 ). bis central bankers ’ speeches of the financial sector or banks is. but at least what we can do is to remove any perverse incentives which could lead to an excessive growth of the sector and its risks. eliminating the too - big - to - fail assumption by making resolution of systemically important financial institutions a