2007 01 white presentation at barclays capital in florida 28 30 january 2007 [mode de compatibilité]
Place Client LogoHere Globalisation and the convergence of inflation rates William R White Economic Adviser and Head of MED, Bank for International Settlements Presentation at Barclays Capital 11th Annual Global Inflation-Linked Conference, Key Biscayne, Florida 28-30 January 2007
A presentation in four parts The facts about inflation Alternative explanations Prospects and exposures Implications for policy regimes
Part 1: The facts Inflation has fallen globally So too has inflation volatility And the inflation process has changed
The inflation process has changed Inflation expectations seem better anchored Persistence has declined Pass-through is lower The responsiveness of inflation to domestic slack is down While the responsiveness to global slack seems to have risen
Part 2: Alternative explanations Effective central bank policy? The “savings glut”? “globalisation of markets”, including labour? Puzzles and the need to pull it all together!
Effective central bank policy? Central banks in industrial countries learned from the 1970s Central banks in emerging markets learned from the industrial countries (IT frameworks) But two puzzles remain: (1) common outcome in spite of widely divergent national circumstances (2) Low inflation in spite of exceptionally easy monetary policy
The “savings glut”? High savings rates outside the US have suppressed global demand and inflation But again puzzles remain: (1) Global saving has not risen, though investment has fallen (2) And global growth remains exceptionally high
Globalisation? Loss of pricing power But still high profits Wages take the hit
Wage suppression Through diverse channels (1) Immigration (2) Import penetration (3) Relocation and contestability
But again puzzles remain Globalisation cannot explain the rise of inflation in the 1970s Nor the long lag before EMEs were affected A more comprehensive explanation of the facts seems necessary
Pulling it all together? Recent low inflation needs to be explained But so too does record global growth And remarkably low interest rates The answer is, all of the above!
Consider a global model Aggregate supply increases As aggregate demand decreases And easy money fills the gap, globally Due to essentially fixed exchange rates
And finally the trade dimension Easy money has different effects in different countries The US and China as two extremes of (1) Low savings (US) and high savings (China) (2) Little (US) and massive (China) investment in tradables
Part 3: Prospects and exposures Will low inflation continue? Are “financial imbalances” a threat? Could deflation be the end game?
Will low global inflation continue? Are inflationary expectations more based on history than credibility? Is the global output gap declining? Does the US have special problems in ULC and the dollar?
Are financial imbalances” a threat? What is meant by financial imbalances? Sources of the problem? Evidence of imbalances today? Exposures?
What is meant by financial imbalances? Significant and sustained deviations from historical norms Such concepts play no part in the one period Keynesian model But cumulative processes were central to pre-War business cycle theory
Sources of the problem? Very low real interest rates Repeated use of asymmetric easing A more “elastic” credit system In sum, liquidity!
Evidence of imbalances today? High prices to buy all illiquid assets (bonds, spreads, equity, houses, art, stamps etc) Low prices to buy liquidity (implied volatility) Heavy debt levels of households Releveraging of corporations (LBOs, M&As) To say nothing of the trade imbalances
Exposures? 1–2–3–4 If all financial imbalances have a single source, all could unwind together Better risk management will protect some, but not others Higher house prices do not increase national wealth
Could deflation be the end game? Global recession with initially stable prices Could lead to deflation Which might or might not be a problem
Part 4: Implications for policy regimes? History shows financial imbalances can pose serious problems If so, price stability is not enough! I believe we need a new macrofinancial stability regime But I must preach to a different audience
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