of exchange rates into import prices, the increase in trade volumes arising from globalization has presumably boosted the relative importance of the exchange rate in the economy, thereby strengthening an unpredictable factor in the monetary policy transmission mechanism. despite the increased openness of the domestic economy to foreign shocks and greater uncertainty about the monetary policy transmission mechanism, economic volatility in the united states and other advanced economies has declined. that stability may be attributable, in part, to the increasing ability of global product and capital markets to buffer the domestic economy against internal shocks. because of globalization, net exports likely absorb a greater proportion of downshifts in domestic spending, foreign competition helps discipline domestic price increases, and – as a consequence of greater cross - border holdings of assets – gains and losses on domestic assets are realized in part by foreign investors. together with the implementation of better monetary policies in many countries, these particular aspects of globalization likely contributed to the " great moderation. " john addresses the question of whether greater economic integration has increased the gains to be had from policy cooperation and coordination. we have seen an example recently in which policy cooperation of a particular type seemed to pay dividends. in december, simultaneous and in some cases coordinated actions by a number of central banks to supply liquidity to banks apparently helped relieve stresses in interbank funding markets. coordination and cooperation were called for because banks today operate in many markets simultaneously, and pressures in one market can readily spill over to others, especially when the normal channels for arbitrage have been disrupted by financial turmoil. the federal reserve and other central banks are examining the implications of this episode for their methods of supplying liquidity and for responding to future interruptions in the flow of liquidity across markets. successful coordination in the provision of liquidity raises the question of whether appreciable gains might be had from coordination of monetary policies more generally. john is skeptical, and so am i. gains from formal policy coordination never seemed large, and it is not clear that globalization has increased them appreciably. policies agreed to under one set of circumstances may no longer be appropriate when circumstances change, as they inevitably will. monetary policy should be able to adjust quickly to such changes ; agreements that must be renegotiated can tie policymakers'hands. that does not mean that no circumstances exist in which coordinated monetary policy actions would be beneficial, but such circumstances are probably quite rare. ultimately, global stability depends on good performance in individual countries, and the record of recent

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