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

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