Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Business cycle wikipedia , lookup
Balance of trade wikipedia , lookup
Nominal rigidity wikipedia , lookup
Chinese economic reform wikipedia , lookup
Protectionism wikipedia , lookup
Monetary policy wikipedia , lookup
Early 1980s recession wikipedia , lookup
Phillips curve wikipedia , lookup
Central Bank of Iceland – International Monetary Fund The Challenges of Globalisation for Small Open Economies with Independent Currencies 31 May – 1 June, Reykjavik Globalisation, import prices and inflation targeting Alex Bowen, Senior Policy Fellow, Bank of England Globalisation is… • “…a hideous word of obscure meaning…” • “a movement in the direction of greater integration, as both natural and manmade barriers to international economic exchange continue to fall” (Martin Wolf (2004)) Falls in transport costs Source: OECD Economic Outlook No 81 (forthcoming) Falls in costs of processing information Source: OECD Economic Outlook No 81 (forthcoming) Falls in tariffs Source: OECD Economic Outlook No 81 (forthcoming) IMF export-weighted measure of global labour supply Source: IMF Global demand Global GDP Per cent Euro Area US China Non-China Asia Rest of World World 6 5 4 3 2 1 0 1980 1985 1990 Source: Thomson Datastream 1995 2000 -1 2005 Imports from low-cost economies Source: IMF Central banks’ interest • “the emergence of China, India, and the former communist-bloc countries implies that the greater part of the earth's population is now engaged, at least potentially, in the global economy. There are no historical antecedents for this development.” (Bernanke, 2006) • “the integration of China, India and other emerging market economies into the world economy… [is] a process that has transformed supply and demand conditions across the globe.” (King, 2006) Central banks’ interest • “Have Tesco, Dixon’s and China done more to keep inflation down than the Bank economists?” (City AM, London, 21 May) • “The globalisation dividend over the past decade, as cheap goods from China pushed down prices, is fading” (Daily Telegraph, London, 16 May) • “China makes lots of cheap goods… the imports help keep US inflation down” (The Business, London, 21 April) • “For years, British consumers… have taken for granted ‘the China effect’ – the downward pressure on inflation that comes from importing cheap goods from the workshop of the world” (The Guardian, London, 18 April) How might globalisation affect inflation? • Raising the consumption wage relative to the product wage: favourable ‘tailwinds’ – Depends on how wage bargainers respond in pay bargaining and consumption • Changing short-run inflation dynamics – Product market competition – Labour market competition – Role of global vs. national indicators of slack UK Phillips Curve RPIX Inflation % 30 1970s 25 20 1980s 1990 to present Unemployment rate % 0 2 Source: Bank of England 4 15 10 5 0 6 8 10 12 14 ‘Globalisation and inflation in the OECD economies’ (Pain, Koske and Sollie (2006)) • Imports from low-cost countries have contributed to lower domestic inflation – Direct accounting effect – Lower-cost imports have put pressure on domestic producers to lower prices in import-competing industries • Domestic inflation less sensitive to measures of domestic economic slack, more sensitive to measures of foreign economic slack Can central banks rely on China and India to do their work for them? • No – Trade theory: once countries have emerged from autarky, the sign of the impact of globalisation on the terms of trade of developed countries is ambiguous – Empirics: the impact on inflation in an accounting sense may not be large, and may sometimes add to inflation – The impact on domestic inflation of an improvement in the terms of trade depends on the policy reaction What is the impact of globalisation on the terms of trade? • Consider a steady increase in the size of the industrial labour force in China • Ricardian model: industrial countries’ terms of trade improve (export prices up relative to import prices) • Heckscher-Ohlin model, no transport costs: impact on terms of trade cushioned by increase in labour intensity in all industries, increased specialisation • ‘North-South’ models: depends on the model. In Dinopoulos and Segerstrom (2006), for example, the North’s terms of trade deteriorate as the Southern labour force increases • Exhaustible natural resource pricing: impact on expected future path of demand and real interest rates important; price increases not due only to short-run supply constraints Emerging market economies’ contribution to world consumption of commodities (2002-2005) Aluminium Copper Lead Nickel Steel Tin Zinc Oil World Consumption Growth, Annual Average % Contribution of Leading EM E's to world consumption growth (%) 7.6 3.8 4.3 3.6 9.2 8.1 3.8 2.2 57 92 103 76 62 88 120 37 Source: WEO Autumn 2006 and IEAD calculations ‘Leading EMEs’ = China, Brazil, India, Mexico and Russia o/w China (pp) 48 51 110 87 54 86 113 30 Cumulative Price Increase (%) 41 136 116 118 n/a 82 78 118 UK terms of trade 1995=100 120 110 100 90 80 Goods and services Goods 70 Services 60 1955 Source ONS 1962 1969 1976 1983 1990 1997 2004 Price levels for UK manufacturing goods imports weighted unit value, £ 20 18 16 14 NMS China High Cost ROW T ot al 12 10 8 6 4 2 1999 2000 Source: ONS and Bank of England 2001 2002 2003 2004 2005 0 2006 Annual import price inflation Low Cost Share Effect Low Cost Price Effect High Cost Inflation Effect Import Price Inflation oya % 6 4 2 0 -2 -4 -6 2000 2001 Source: ONS and Bank of England 2002 2003 2004 2005 -8 2006 ‘Has globalisation changed inflation?’ (Ball (2006), NBER WP 12687) • ‘Has globalization reduced the long-run level of inflation?’ • ‘Has it affected the structure of inflation dynamics, as summarized by the Phillips Curve?’ • ‘Has it contributed substantial negative shocks to the inflation process?’ ‘Has globalisation changed inflation?’ (Ball (2006), NBER WP 12687) • ‘Has globalization reduced the long-run level of inflation?’ No • ‘Has it affected the structure of inflation dynamics, as summarized by the Phillips Curve?’ No • ‘Has it contributed substantial negative shocks to the inflation process?’ No Inflation in industrial countries per cent 35 30 25 20 15 United Kingdom 10 5 0 Q1 1962 Q1 1972 Source: Bank of England Q1 1982 Q1 1992 Q1 2002 -5 Goods and services inflation Per cent Services 6.0 5.0 4.0 3.0 CPI 2.0 1.0 0.0 -1.0 Goods -2.0 -3.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: ONS Conclusions • Globalisation a hugely important phenomenon… • …but not primarily a monetary one • It could have a significant impact on short-run inflation dynamics in developed open economies… • …but the evidence is not clear-cut • Monetary policy, not relative import prices, is the key determinant of domestic inflation Further work needed • Defining terms: what is globalisation? • Integrating trade theory and open-economy macroeconomics better • What determines emerging-market export prices? • Estimation and testing of structural models of inflation with an explicit foreign sector and policy function