trading and payments technologies enabled investors and banks to shift assets quickly away from currencies prone to inflation and related risks. in the 1990s, many countries - including brazil, korea, and mexico - implemented real - time gross settlement payment systems, which allowed markets to rapidly settle payments and other obligations with finality during the day. • financial innovations such as credit card networks and money market mutual funds allow households and firms to minimize their holdings of cash and central bank reserves, thus shrinking the base of the inflation tax. • increased circulation of banknotes in dollars or other hard currencies enable citizens to conduct transactions without holding inflationary currency. data published on the federal reserve ’ s website show a dramatic increase in the fraction of u. s. federal reserve notes that are estimated to be held in foreign countries. the fraction of u. s. federal reserve notes held abroad rose from under 20 percent in 1980 to almost 50 percent in the late 1990s. given these innovations, a government that pressures a central bank to pursue an inflationary policy gets much less benefit for each unit increase in inflation because people can more easily switch out of the local currency. in other words, the inflation tax becomes much more difficult and costly to levy because citizens can more easily avoid the tax by using an alternative money. the second and closely related factor behind disinflation is deregulation and competition in a globalized marketplace. the collapse of the centrally - planned economies has led many countries to turn increasingly to private markets to deliver growth and progress and reduce the role of government. technology has helped to increase global competition by shrinking the barriers of time and distance. again, there are several channels by which globalization and competition may have affected the costbenefit tradeoff in pursing inflation : • as kenneth rogoff pointed out at the 2003 jackson hole conference sponsored by the federal reserve bank of kansas city, greater competition leads to more - flexible prices. 8 when prices are more flexible, a central bank ’ s ability to temporarily influence output is diminished while its influence on inflation is enhanced. thus, more - competitive markets naturally help central banks achieve price stabilization. i discussed aspects of this factor in my presentation at a may 2001 conference at the federal reserve bank of cleveland, cited above. kenneth s. rogoff ( 2003 ), " globalization and global disinflation, " in monetary policy and uncertainty : adapting to a changing economy : a symposium ( federal reserve bank of kansas city, aug. 28 – 30 )

of the countries themselves. in particular, more flexible exchange rates will help domestic demand fill in the gap left once foreign demand falls back to a more sustainable level. more flexible exchange rates also provide domestic policymakers greater scope to focus on domestic goals of full employment and price stability. it is worth underscoring that even if authorities around the world aggressively undertake structural reforms that ameliorate current global imbalances, these actions will not preclude the emergence of large current account surpluses and deficits in the future. but the emergence of such imbalances should not necessarily be worrisome. as i noted earlier, in a world where different economies are periodically buffeted by different types of shocks, some of which may be quite persistent, cross - country dispersion in external balances is a perfectly natural way of smoothing the effects of these shocks over time. what is important is to ensure that international capital flows do not combine with other weaknesses in the financial system to lay the groundwork for some future global crisis. consequently, we need to work simultaneously on rebalancing global demand and strengthening the structure, operation, and governance of financial systems. neither task is easy, but both are essential to a more stable world than the one we have experienced over the past few years.