martin redrado : globalization and the determinants of domestic inflation remarks by mr martin redrado, governor of the central bank of argentina, at the international symposium on “ globalisation, inflation and monetary policy ”, organised by the bank of france, paris, 7 march 2008. * * * globalization has grown as a natural evolution of our era, not only incorporating more countries into the process, but also increasing their mutual interdependence. there are reasons to believe that this phenomenon is not harmless for domestic prices ; therefore, the critical question to discuss is : to what extent does globalization affect domestic prices and what are the channels through which they are affected? this session – enriched, undoubtedly, by bill ’ s paper 1 – aims, at least, to make headway in some aspects of this question. my comments are divided in three parts. first, let me introduce some general remarks on the paper. second, i bring up some specific and constructive comments with the view of complementing the approach of the study. and, before concluding, i focus on the prospects for inflation in the light of current financial turbulences. i put special emphasis on the impact of key factors for emerging market economies such as food inflation and commodity prices. bill ’ s appealing work presents a detailed overview of the main potential and not necessarily excluding explanations for the dramatic and persistent diminishing of inflation over the last 20 years. it also poses challenging policy dilemmas that arise from these trends and from the recent developments in the world economy. as he correctly stresses, domestic and global factors seem to have complemented to explain the decline of inflation worldwide. the paper ’ s central message is that the different mechanisms that have been proposed to explain the alleged impact of globalization on domestic inflation should be seen as working together rather than be perceived as alternative hypothesis. and, we can hardly argue against this view. in fact, i notice a trend, mainly in this type of seminars, to try to find a single preeminent explanation for each economic phenomenon under study. but it will not be a fruitful approach in this case, given the complexity of the issue and the special historical context in which it takes place, which makes it more difficult to find a single ultimate explanatory factor. indeed, all the offered explanations are plausible, even though the empirical evidence is often mixed. the author reviews the literature and underlines the limitations faced by each hypothesis to confront the so - called “ puzzles ”. the concept is

far east, while volatility turned out to be eight times higher. this caused huge economic and social losses, impacting on our development possibilities and leading to changes in citizens ’ behavior. in fact, portfolio dollarization, fiscal and financial dominance, and the negative correlation between changes in bank savings and exchange rate fluctuations are some of the distinctive features of this process. these factors, which undermined the power of some traditional monetary policy instruments, have played a key role in the design of our monetary and financial system. it is essential to ensure “ buffers ” that help, above all, eliminate the feeling of “ the next crisis around the corner. ” our strategy has enabled us to overcome each volatility episode in the new international context ( four in the past two years ), minimizing the impact on the real economy. a lesson learned from the crisis is that in emerging countries structurally characterized by fiscal deficit and current account imbalances, asset prices were hit the hardest. the impact has undoubtedly been stronger in the emerging economies with distinct external vulnerability and higher financial fragility, for example, economies with high expenditure, currency mismatch, and hard pegs. in latin america – traditionally characterized by highly procyclical policies – this financial and external soundness has nevertheless allowed for something unprecedented. i mean we have had room for manouver to mitigate the effects of the crisis, which for the first time was not centered around the emerging world. fiscal responsibility in most of our countries has ceased to be discussed in terms of the left or right – it has simply been accepted as common sense. the windows of opportunity have been taken advantage of to reduce the external debt, minimize currency mismatches and reduce the excessive concentration of banking system ’ s credit risk in the public sector. special mention should be made of the building of liquidity networks both in foreign and local currency. this has been a common pattern among asian and latin american emerging countries and, in my opinion, has been well institutionalized since it raises confidence for domestic economies. today, even after the worst of the crisis is over, there is still no international lender of last resort. consequently, there is no adequate substitute either for a foreign reserve accumulation policy at the national level. this is also the case with construction and development through the prudential regulation of banking systems with high liquidity and solvency buffers to cushion shocks instead of amplifying them. it is still the responsibility of each country to