donald l kohn : implications of globalization for the conduct of monetary policy speech by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, at the international symposium on “ globalisation, inflation and monetary policy ”, organised by the bank of france, paris, 7 march 2008. * * * let me begin by saying that i agree with the thrust of john's remarks. he is right that globalization has not fundamentally changed the way central banks should do business. although production chains and capital markets are more integrated across countries than before, and gross trade flows now account for a larger share of gross domestic product ( gdp ) in most nations, the dynamics of aggregate output and inflation remain at least qualitatively the same. accordingly, central banks should continue to conduct monetary policy in the same forward - looking manner as they have for the past twenty years or so, adjusting policy rates in response to current and expected future movements in output and inflation, taking account of the lags in monetary policy. when exchange rates are free to adjust, this general approach to policymaking has proven effective in fostering macroeconomic stability over time in many countries. 1 in my remarks, i will expand on another of john's points – namely, that monetary policy making has been complicated by globalization, particularly by rising trade volumes and increased capital market integration. that is true in several ways. for one thing, globalization has likely made the domestic economy more sensitive to foreign shocks, so central banks must now pay more attention to events around the globe. and, the integration of china and other countries into the world market economy has expanded the scale and complexity of the foreign developments that central banks must monitor. finally, globalization has probably made the link between policy actions and economic outcomes more uncertain by, among other things, strengthening the role of the exchange rate in the monetary policy transmission mechanism. recent increases in prices for oil and other commodities illustrate some of the complications that globalization creates for policymaking. those price increases have raised inflation worldwide while accentuating already weakening growth prospects in some countries in recent months. commodity prices depend on a wide range of demand and supply factors, and sorting out their various contributions can be difficult. in recent years, potential constraints on the expansion of supply, especially of petroleum, have played a role. but in addition, the emergence of china, india, and other industrializing asian economies as major consumers of oil and other raw materials has complicated the analysis, partly because these countries

account of the views of market participants and other interested parties with views on the volcker rule, including what is working and what is not. we expect this process will proceed with dispatch. we must also work within the confines of the statute. for example, a number of my current and former federal reserve board colleagues have expressed support for congress providing an exemption from the volcker rule for community banks, which is something i also support. 5 short of a statutory exemption, we can only do our best to mitigate burden on community banks that generally do not engage in the types of activities the volcker rule was intended to cover. 6 statutory changes likely would make our work of streamlining more straightforward and complete, but we have a fair bit that we can accomplish even absent such changes. what are some of the improvements that we are thinking about that would be possible within the regulation itself? as an initial matter, it should be clearer and more transparent what is subject to the volcker rule ’ s implementing regulation and what is not. the definition of key terms like “ proprietary trading ” and “ covered fund ” should be as simple and clear as possible. it should not be a guessing game or require hours of legal analysis of complex banking and securities regulations to determine if a particular entity is a covered fund. it should not happen — although it has happened — that our supervised firms come to us and ask questions about whether a particular derivative trade is subject to the rule, and we cannot give them our own answer or a consistent answer across the five responsible agencies. supervisors need to be able to provide clear and transparent guidance on what is covered by the volcker rule and what is not. this would benefit not only the firms, but the supervisors at the agencies as well. again, a good example is the exemption for market making - related activities, which is one of the key exemptions from the prohibition on proprietary trading. the rule contains a gaggle of complex regulatory requirements, but the statute contains merely one — that the market making - related activities are designed not to exceed the reasonably expected near - term demands of clients, customers, or counterparties, otherwise known as rent ’ d. 7 we are considering different ways to use a clearer test for rent ’ d. we want banks to be able to engage in market making and provide liquidity to financial markets with less fasting and prayer about their compliance with the volcker rule. as i noted earlier, we also understand that the volcker rule has had an extra