october 16, 2018 bank of japan globalization and monetary policy panelist speech at bis symposium to mark the 20th anniversary of the bis representative office for asia and the pacific ( hong kong, october 15, 2018 ) haruhiko kuroda governor of the bank of japan first of all, i would like to extend my sincere congratulations to general manager carstens, dr. remolona, chief representative for asia and the pacific, and other staff members of the bis asian office on the office's 20th anniversary. over the past twenty years, the asian economies have experienced significant changes, particularly improvements in resilience to external shocks. the bis asian office has played an important role in these improvements, including by enhancing cooperation among central banks in the region. i will touch upon the importance of regional cooperation in promoting global monetary and financial stability later, but let me first discuss price and financial stability within individual economies under globalization. how has globalization affected price and financial stability? as we saw in the global financial crisis a decade ago, and in the asian financial crisis about two decades ago, global or regional financial integration did affect domestic financial stability in many countries. while financial integration facilitates consumption smoothing and diversification of risks across countries, large and volatile capital flows carry risks for global financial stability. compared with the effects on financial stability, what is less evident is how globalization has affected price stability. since bis economists, about a decade ago, proposed the hypothesis that the factors influencing domestic inflation have become increasingly global, 1 this hypothesis has attracted considerable attention. a large body of empirical studies have examined whether, and to what extent, global factors such as global economic slack and global competition have affected domestic inflation dynamics, and whether their roles have increased with global economic integration. the evidence so far, however, still seems to be inconclusive. there could be several channels through which globalization affects domestic inflation. most obviously, movements in import prices directly affect consumer prices. moreover, some global factors such as international competition pressure and cross - border price differentiation of multinational corporations could affect domestic prices without actual import flows. these channels may be captured by the global output gap and global markup of price over cost as additional explanatory variables in the standard phillips curve equation, in addition to import prices. more recently, bis economists have demonstrated that the growing 1 borio, c. and a. filardo ( 2007 ) " globalisation and inflation : new cross - country evidence on the global determinants of domestic inflation,

makoto's personal assessment. crisis ( gfc ), and it is currently experiencing a major depression caused by the novel coronavirus ( covid - 19 ) pandemic. although monetary policies in japan remained accommodative almost throughout, the economy did not decisively overcome economic stagnation and deflation. one reason that monetary easing was unable to stimulate sufficient demand is that the money stock did not rise enough relative to the monetary base ( i. e., the money multiplier fell ), due in part to the decline in the functioning of credit intermediation, especially during the crisis of japan's financial system in the late 1990s. furthermore, since the money demand function became unstable with growth expectations declining as deflationary sentiment took hold and interest rates approaching the zero lower bound, the effectiveness of accommodative monetary policies may have declined accordingly. thus, it is likely that accommodative monetary policies that would have been quite powerful based on conventional standards had a much smaller effect than expected. this raises the question whether the scale of monetary easing was sufficient. iii. monetary policy under globalization the main objectives of monetary policy can be summarized as ( domestic ) price stability and sound development of the national economy, such as maximizing employment or maintaining an appropriate balance of supply and demand. central banks conduct monetary policy to achieve these goals in line with the particular conditions of their domestic economy. however, in a globalized world economy, monetary policies in one country are inevitably affected by the economic conditions and monetary policies of other countries. the transition from a fixed to a floating exchange rate system in the 1970s and the subsequent advances in globalization have meant that macroeconomic policies, including monetary policies, and their effectiveness must be considered within the framework of international finance ( open macroeconomics ). the move to a floating exchange rate system has led to the so - called " trilemma of international finance, " which is summarized in table 1. table 1 : the trilemma of international finance regime monetary policy international capital flows exchange rate fixed exchange rate similar regulated fixed similar ( due to similar economic trends ) stable flows stable independent free flows variable floating exchange rate the trilemma of international finance refers to the fact that economies cannot maintain ( 1 ) a fixed exchange rate, ( 2 ) independent monetary policy, and ( 3 ) free international capital flows all at the same time. one of the three must be relinquished. giving up ( 1 ) results in a floating exchange