boediono : macroeconomic impact of climate change – opportunities and challenges ( keynote speech ) keynote speech by prof dr boediono, governor of bank indonesia, at bank indonesia ’ s annual international seminar on “ macroeconomic impact of climate change – opportunities and challenges ”, nusa dua, bali, 1 - 2 august 2008. * * * fellow governors, distinguished speakers and scholars, ladies and gentlemen, good morning! it is indeed a pleasure and an honor for me to welcome all of you to bank indonesia ’ s annual international seminar in this beautiful and majestic island of bali. this seminar has become one of bank indonesia ’ s annual traditions, and this year ’ s event marks its 6th “ anniversary ”. it is truly heartwarming to see the presence of distinguished guests in the audience – fellow governors, deputy governors distinguished speakers and scholars from various world leading universities. we are truly delighted by your attendance. we are looking forward to having lively discussions and hearing your valuable insights. having this good mix of participants we can surely hope for richer policy perspective on global warming and climate change. in this same island last year, during the 2007 un climate change conference, 187 nations have acknowledged the unequivocal evidence of global warming and risks of severe climate change impacts. the bali road map produced by that conference was a significant milestone in the global drive to address the issues arising from global warming and climate change. the inter - governmental panel on climate change ( ippc ) concluded that global warming could cause significant change to biological and physical systems, such as an increase in tropical cyclone intensity, changes in precipitation pattern, salinity of the sea, wind patterns, the reproductive period of animals and plants, species distribution and population, epidemics, and also influence various ecosystems in high latitude ( including the arctic and antarctic ), high altitude locations, as well as coastal ecosystems. some of these effects will only be felt in the long run, some in the not too long run and some, such as the rise in the frequency and intensity of extreme weather with all of its consequences, are already evident now. however, we need to recognize the fact that there is an asymmetry in the capability of citizens and governments in the developing and developed countries in coping and mitigating the crises ’ adverse impacts. it is now agreed that to effectively respond to such a global challenge, we need a global and coordinated agenda of actions. in developing such an agenda, we ought to bear in mind that for

however, is to downplay current challenges of maintaining price stability in the face of global forces. the combination of the growing contestability of markets and prolonged synchronised weak demand may be restraining wage expectations. moreover, technological changes, particularly those which could globalise markets for many services, may extend and deepen trend global disinflation. and, the global financial cycle could exacerbate the challenges of returning domestic inflation to target, particularly given the proximity of interest rates to the effective lower bound. charting a path for monetary policy in this environment thus requires a nuanced understanding of how globalisation both affects inflation and influences the stance of monetary policy. it is to these i will now turn. global influences on domestic inflation in a closed economy, inflationary pressures depend on developments in domestic costs, which in turn depend on domestic spare capacity, or the balance of domestic supply and demand. opening up the economy changes this relationship in three ways. all speeches are available online at www. bankofengland. co. uk / speeches most straightforwardly, external demand exerts pressure on domestic resource utilisation and therefore domestic inflation. the importance of this channel has steadily increased for most of the past half century ( chart 4 ). chart 4 : external demand has steadily increased in importance sources : imf and bank calculations. next, in an open economy, prices of imports affect domestic inflation both directly – through the final goods and services bought by households – and indirectly – through the prices of imported intermediates used in the production of final goods and services in the consumption basket. for years the direct effect has imparted a steady disinflationary bias. the integration of lower - cost producers into the global economy acts like an increase in potential supply for advanced economies, raising the level of spending that is consistent with inflation at target. thus far, this disinflationary effect has mostly affected the prices of goods ( chart 5 ), as trade in goods has been liberalised to a much greater extent than services. monetary policy makers in advanced economies have responded by accommodating relatively higher services price inflation in order to meet their inflation objectives. for example, in the uk core goods prices fell an average of 0. 3 % over the past two decades, services prices rose by an average of 3. 4 % and total cpi inflation was on average at target. the slowing of trade growth since the financial crisis largely reflects the rotation of global growth to countries with less