as a continuing, pervasive check on inflationary tendencies in industrial economies. in contrast, just two weeks ago, i attended a conference of leading academic and central bank researchers on inflation hosted by the federal reserve board, at which globalization was hardly mentioned. one modeler had tacked an import price variable onto the equations explaining u. s. inflation, but the rest simply ignored any developments beyond our borders. for a monetary policy practitioner, this disconnect raises a puzzle and some very basic concerns. a possible implication of the view in the media is that the inflation penalty for allowing economies to run a little " hotter " than normal - - that is, a bit beyond an economic long - run sustainable output - - could be quite small, if there is any penalty at all. the academic view implies that for the most part i can proceed with regard to inflation as if the united states is, to a first approximation, a closed economy. to act as if the outside world does not matter flies in the face of the major changes we have witnessed in recent decades. the advance of globalization has increased the range of goods and services available to be imported by u. s. households and firms and reduced the prices of many imported goods and services. in the case of consumer goods, these developments have directly held down the rate of increase of the imported - goods component of the consumer price index ( cpi ) and, thus, the rate of increase of the overall index ; this direct effect on cpi inflation has risen over time as the import share of household spending has increased. beyond this effect, falling prices for imported materials as well as capital equipment have reduced the production costs of u. s. firms, thereby indirectly restraining the growth of prices of domestically produced goods and services. globalization has reinforced disinflation by intensifying the competitive pressures faced by u. s. firms and workers. for some firms, the actual or potential availability of less - expensive foreign goods has squeezed profit margins and may have intensified the firms'search for cost - saving productivity enhancements. for workers in some sectors, labor compensation has likely been restrained by the threat of jobs being shifted overseas to take advantage of lower production costs in the new trading nations, and this wage restraint in turn has helped to hold down domestic prices. how important have these direct and indirect price effects been? a precise answer to this question is beyond our abilities, but we can try to get a handle on the likely magnitude by using a simple reducedform inflation

fully flexible exchange rates are probably contributing to the surpluses of these economies and to their disinflationary effect on the rest of the world. taking all these factors into account, where do i come out on the question of how recent trends in globalization have affected inflation in the united states and other industrial countries? on balance, under current circumstances, the entry of china, india, and others into the global trading system is probably having a modest disinflationary effect here. but it is neither large nor inevitable. if some fundamental conditioning factors were to change - - for example, if these countries'exchange rates were to rise and their demand to increase - - different spending patterns that could reduce the degree of downward pressure on prices might emerge. in fact, we cannot rule out the possibility that globalization might some day even create inflationary pressures on balance. steven b. kamin, mario marazzi, and john w. schindler ( 2004 ), " is china'exporting deflation '? " international finance discussion papers series 2004 - 791 ( washington : board of governors of the federal reserve system, january ). 5 / 7 the implications for productivity, potential output, and the nairu if globalization is having a modest but persistent downward effect on u. s. inflation, what about its effects on employment, the other component of the federal reserve's dual mandate? here, i think the answer is clearer : an expansion of trade does not impinge on an economy's ability to create jobs and operate at its potential, given time for any temporary sectoral disruptions to be worked out. the logic behind this claim is ricardo's classic observation that, even if one economy could produce every good and service less expensively than another economy, in a trading world it could not and would not become a seller of everything. instead, every economy benefits by specializing in producing those goods in which it has a comparative efficiency advantage. thus, as trade expands, even high - cost economies will see jobs become available in those industries in which they are comparatively more efficient. to be sure, a major increase in job turnover as a consequence of expanding trade, with the attendant shifting of resources from one industry to another, could make it harder to match jobs and people, especially if the people losing jobs failed to meet the skill requirements of the sectors gaining jobs. this job - worker mismatch might for a time tend to raise the economy's sustainable nonaccelerating -