##my ”, ( january 2008 ). trade theory ( stolper - samuelson theorem ) would e. g. suggest that trade integration should place downward pressures on the relative return to lower - skilled labour. however, real wage developments have been similar across all skill groups in the euro area. see ecb ( 2008 ), op. cit. while globalisation and the disciplining impact that it exerted on pricing and cost control is likely to have facilitated disinflation around the globe in the past ten years or so, globalisation per se cannot permanently reduce inflation. the main reason for the observed spread of low inflation around the globe in recent years is a of competition would also induce firms to work harder to increase productivity, and this would translate into an increase in the growth rate of the natural level of output. 4 • beyond this effect, the increasing use of international production opportunities based on comparative advantage may lead to a change in the production structure of our economy, which would in turn alter the relative scarcity of production factors, and thus the response of their prices and the prices of final goods to economic shocks. thus, globalisation • is of importance to monetary policy • and it is likely to have a lasting effect on our economy and on the environment for monetary policy - making. an initial conclusion therefore is that central banks need to continue to commit resources to analyse and closely monitor the structural changes and the shocks caused by globalisation, and need to build an increasing awareness of economic and financial developments outside their home countries. globalisation does not change rules of monetary policy - making although globalisation is challenging monetary policy, i fully agree with john taylor ’ s assessment that globalisation does not fundamentally alter the rules for monetary policymaking. nowadays as ever, over the medium to longer term, inflation is a monetary phenomenon. this means price stability is for us to achieve. let me stress the obvious here, namely that central banks cannot permanently determine the relative prices of specific goods. in referring to price stability, we mean stability of the purchasing power ( of the domestic legal tender ) as measured by the cost of a representative basket of goods. while international liquidity conditions may influence market interest rates and thus the transmission of monetary policy to real activity and inflation, central banks retain the ability to control short - term interest rates by appropriately influencing the supply of the domestic legal tender. short - term rates in turn work their way into the domestic cost of credit and into longterm interest rates.

strong conclusions that john taylor draws from some of his empirical analysis. in brief, john taylor finds that a simple monetary policy rule, also widely referred to as the “ taylor rule ”, when applied to the euro area, has residuals that correlate positively with the us federal funds rate. he interprets this finding as implying a leader - follower structure in the sense that us monetary policy induces the ecb to deviate from its objective of price stability out of concern for the exchange rate. this is not the case. indeed, a more reasonable explanation for john taylor ’ s findings is the following : central banks which are concerned with domestic price stability seek to offset potentially destabilising shocks. in a globalised world, though, different central banks naturally respond in part to similar global factors. and, as we know, a number of these factors are not well captured by a mechanical policy rule of the type which john taylor takes as a benchmark for good monetary policy - making. adequate policy reactions to global factors, and to the risks that they pose for domestic price stability, will thus show up – within the context of a simple rule – in the residual term. some observers, john taylor included, interpret this residual as a measure of the monetary stance. it may indeed, in some cases, be possible to interpret the residual in this way. however, often the residual is a measure of the lack of explanatory power of the simple policy rule itself. now, to the extent that economies are structurally different and are hit by shocks with different timings, • global factors affect these economies with different lags. • as a result, the measures of inflation and the output gap used in john taylor ’ s policy rule are also affected with different lags. • in such a context, monetary policy has to react in a pre - emptive manner to current and future likely developments to ensure domestic price stability over the medium to longer term. • however, such a behaviour might generate a spurious correlation between the residuals of a simple taylor type policy rule for the euro area and interest rates in other economies. i suspect that this is what lies behind john taylor ’ s result concerning the deviations from a euro area “ policy rule ” and the us federal funds rate. having inside knowledge, i can in fact rule out that john taylor ’ s results constitute any sign of a leader - follower structure or any sign of a focus on the side of the ecb on the dollar -