View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Comments on Stylized Facts
of Globalization and World Inflation
Remarks for a panel discussion at the International Symposium
of the Banque de France on Globalisation, Inflation and Monetary Policy

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Paris, France
March 7, 2008

The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve System.

Comments on Stylized Facts of Globalization and World Inflation
Richard W. Fisher
First, I’d like to thank Governor [Christian] Noyer for the invitation to participate in this
conference. The topic could not be more timely, and it is one that is close to my heart. It is a
great privilege to discuss this paper by Ken Rogoff.
When I took office as president of the Dallas Fed three years ago, I made it clear that I wanted
our signature research issue for the coming years to be the study of the implications of
globalization for the conduct of monetary policy in the U.S. To this end, we have created a
Globalization and Monetary Policy Institute and have assembled a blue-ribbon advisory board
that includes Ken Rogoff among its members.
Let me start by posing a rhetorical question. Should the default framework for thinking about
monetary policy in a country like the U.S. or, indeed, in the euro area, be an open economy
where capital flows across national borders, goods and services are sourced from the cheapest
global suppliers, interest rate movements in one country impact rates in another, and exchange
rates factor in firms’ pricing and production decisions? Or can we get by thinking in closedeconomy terms, where domestic investment is financed with domestic savings, we only consume
what we produce, interest rates are determined at home and exchange rates are irrelevant?
Nobody who has lived on the planet since the fall of the Berlin Wall and the ascendancy of Deng
Xiaoping would likely testify to the validity of the second proposition. Globalization means that
we can no longer guide policy by ignoring trade and capital flows or the invisible but nonetheless
effective links between countries that have been forged through cyberspace. Yet it appears to me
that the default framework for thinking about monetary policy continues to be the closedeconomy model.
Now on to Professor Rogoff’s paper. Ken’s paper starts with a review of some of the salient facts
about globalization and segues to a discussion about the seeming resilience of the globalized
world economy and the important role that better monetary policy plays in ensuring that
resilience. He then proceeds with a discussion of the central role China seems to be playing in
the recent acceleration of globalization, assesses its impact on global commodity prices and then
wraps up with a very nice discussion of whether the recent subprime crisis is all that different
from previous banking crises.
Globalization means different things to different people. To the Chinese peasant it may mean the
prospect of an end to poverty and steady improvement in his living standards. To the American
or French factory worker it may mean the threat of cheap imports and the potential outsourcing
of his or her job. To the environmental activist it may mean the despoliation of the earth’s
atmosphere as more countries industrialize and pour pollutants into the atmosphere. To the
public intellectual it may mean the loss of national identity and the Americanization of culture.
There are many important dimensions to globalization, but as a central banker, I am most
interested in the economic dimensions, namely the greater integration of national economies
through increased trade of goods and services, investment, migration, and task allocation. All of
these facilitate the dissemination of ideas and technologies that are another key manifestation of
globalization and indeed contribute to its spread.

However, it is extraordinarily difficult to get a good handle on just how rapidly the world is
globalizing. As Ken notes, there is a lot of hype out there about how many new workers and
consumers have become part of the global economy as a result of the demise of communism and
the opening of China, India and other economies. The raw numbers in terms of population are
huge—we are talking billions with a “b”—but the true extent to which the workers in these
countries are, for want of a better word, substitutable for workers in advanced economies is an
open question. It is this substitutability that determines how the coming on line of this new labor
force will impact the wages of workers in the advanced economies. It would appear that the
number of workers in countries like China and India who possess skills comparable to those
found among the workforces of the U.S., Europe and other advanced nations is a small subset of
the headline numbers.
It is worth reminding the audience that the nominal per capita income of the average Chinese
citizen today is, in inflation-adjusted terms, roughly equivalent to that of an American worker in
the early 1900s. And yet, for those workers who possess the skills demanded by a modern
economy, wages have rapidly approached advanced-economy levels. There are abundant
anecdotal reports that the salaries of top programmers in Mumbai are quickly converging to
those of their peers in Silicon Valley. Likewise, there is rapid wage growth for managers in
China who can work in Western companies. Indeed, just last week the Financial Times reported
on million-dollar bonuses paid to certain Chinese executives in the financial sector. But the vast
majority of the new workers in the global economy at present bring little more than their raw
labor and thirst for betterment.
Technological improvements and policy changes have both been important drivers of
globalization. The information technology revolution has played an important role in breaking
down the barrier between those goods and services that were hitherto thought to be tradable
across national borders and those that were not. Services that were long considered to be the
quintessential nontradable good are increasingly traded internationally. If you do the numbers,
you will find that the U.S. exports a lot more services than it imports, and moving up the valueadded chain into more service-oriented sectors is key to the continued competitiveness of the
U.S. economy.
By some measures, financial globalization has proceeded even more rapidly than the “real”
globalization that is rooted in trade flows. In some sense, this is not too surprising. While
innovations in transportation technology—such as the inventions of container shipping and the
jumbo jet that Ken mentions in his presentation—have helped reduce the effective geographic
distance between countries, making it easier to trade goods, distance in a very fundamental sense
still matters for trade. However, the information technology revolution has effectively eliminated
the idea of geographic distance in financial and several other service transactions. Financial
trades can be executed at any time of the day in any part of the world at the click of a mouse.
Architectural renderings can be created thousands of miles from the firm that commissions them.
X-rays and CAT scans of patients in Dallas or Paris can be analyzed in Sydney or Delhi while
their Texan or French doctors sleep. As long as the earth rotates on its axis and satellite and
Internet connections are maintained, technology never sleeps in a globalized world, nor does the
production of other goods and services.


Globalization is not new. Some of the key technical innovations that make today’s globalization
possible are a half century old or older. But it is perhaps worth emphasizing that much of the
globalization that occurred in the immediate post-World War II period was simply getting us
back to where we were on the eve of World War I. As is well known, by the early 1970s, trade
flows had gotten back to where they were in 1913, but other key dimensions of globalization,
capital flows and migration, were still well below their pre-World War I levels. Indeed, the
reversal of globalization in the interwar period is something we should never forget and serves as
a reminder that we cannot take a liberal international economic order for granted.
Writing shortly after the end of World War I, John Maynard Keynes commented on how
thoroughly “internationalized” (his expression) the world was in 1913. It is worth repeating what
he said: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the
various products of the whole earth, in such quantity as he might see fit, and reasonably expect
their early delivery upon his door-step; …[and] at the same moment and by the same means
adventure his wealth in the natural resources and new enterprises of any quarter of the world, and
share, without exertion or even trouble, in their prospective fruits and advantages; or he could
decide to couple the security of his fortunes with the good faith of the townspeople of any
substantial municipality in any continent that fancy or information might recommend. He could
secure forthwith, if he wished it, cheap and comfortable means of transit to any country or
climate without passport or other formality, could dispatch his servant to the neighboring office
of a bank for such supply of the precious metals as might seem convenient, and could then
proceed abroad to foreign quarters, without knowledge of their religion, language, or customs,
bearing coined wealth upon his person, and would consider himself greatly aggrieved and much
surprised at the least interference.” Most important of all, this average inhabitant of London
“…regarded this state of affairs as normal, certain, and permanent, except in the direction of
further improvement, and any deviation from it as aberrant, scandalous, and avoidable.”
That rather bucolic description of globalization as it once was practiced was penned by Keynes
in The Economic Consequences of the Peace in 1919. It seems unlikely that the unique set of
circumstances that led to the collapse of globalization between the great wars of the twentieth
century will ever be repeated, but newer twenty-first century challenges could just as easily
impede the progress of globalization.
Taking a very long-term perspective on globalization, looking at it from the perspective of
centuries and not just decades, also teaches us something about the role of the monetary standard
in promoting international economic integration. The nominal stability associated with the gold
standard played an important role in fostering globalization in the nineteenth century. The
transition to a fiat standard created some challenges for central bankers, but in recent years
central bankers have come to a better understanding of how they need to conduct monetary
policy under a fiat standard and have done a good job at delivering price stability. Ken is right:
High inflation is much rarer now, with only two countries experiencing what might be
considered very high or hyperinflations. This greater nominal stability is a key factor underlying
the surge of globalization over the past decade and a half and remains vital to continued
But how resilient are the new monetary frameworks? Is the adoption of formal or informal
inflation targeting the key to central bank successes in recent years, or have they been the
beneficiaries of a dollop of good luck in the form of higher productivity growth? Better monetary

policy helped make greater globalization and faster productivity growth possible, but
globalization and faster productivity growth also made the jobs of central bankers easier. The
more challenging circumstances that have developed over the recent past—as the tailwinds that
ensued from the addition of new workers to the production side of global output have morphed
into headwinds of demand for scarce resources—will serve to stress-test the new monetary
policy frameworks in ways they have not been tested before.
No discussion of globalization would be complete without some mention of China’s
extraordinary growth over the past decade. The raw numbers are staggering, from the rapid
urbanization of its population to the extraordinary increases in output year after year and the
voracious demand for raw materials as it becomes the workshop of the world. Ken asks what
would happen to the favorable inflation and productivity environment if internal stresses in
Chinese society were to cause the authorities to slow down or even reverse some of the recent
market reforms. There can be little doubt that the Chinese authorities face a gargantuan task in
managing the transition of the economy to a free-market system. Recent strains have manifested
themselves in higher inflation, and the ability of the authorities to control that inflation is clearly
hindered by the exchange-rate regime. Greater exchange-rate flexibility will enhance the ability
of the People’s Bank of China to deliver price stability, the surest contribution any central bank
can make to improvements in living standards over the long term.
Globalization does matter for inflation, but not in the ways that are often suggested in the media.
The most common fallacy is, of course, the confusion of relative price with price level changes,
the idea that a flood of cheap imports from China must of necessity lower the price level and the
inflation rate. The channels whereby globalization affects inflation are much more subtle and not
always necessarily benign. Furthermore, I believe that different dimensions of globalization
affect the dynamics of inflation in fundamentally different ways.
Let’s start with trade. The availability of cheap imports from China and other countries does
have a direct and indirect impact on domestic prices and inflation. There has been a significant
amount of work in recent years trying to document the size of this effect. The estimates vary, but
they are generally significant. But the mechanism whereby the price changes are realized is
subtle. Yes, there is a direct effect through the availability of cheaper imports. When those
cheaper imports are inputs into the production process, we know they directly lower prices at
home. The price effect is not just relative, but absolute. But that will be offset to some extent as
consumers use their enhanced purchasing power to buy more of other products, putting upward
pressure on prices. The threat of competition also has an effect on the pricing decisions of
domestic firms, both for firms producing products that are close substitutes for the imported
goods and for firms that use those imports as inputs. Cheaper imports will also have an impact on
the wage demands of workers who consume those goods. Of course, the effect is not all in one
direction, as Ken notes in his paper. The downside of the rapid growth in production in low-wage
countries is the upward pressure that this growth has put on commodity prices worldwide. Faster
growth in incomes is having a significant effect on global food prices, although some of the
recent increases have been driven by policy changes encouraging the production of biofuels and
supply-side developments as well.
The thirst of the emerging-market economies for raw materials and the relative inefficiency with
which they use these raw materials has propelled industrial commodity prices to record levels.
The fact that these increases have been persistent and not quickly reversed has raised tough

questions about traditional measures of core inflation and made it increasingly difficult for
central bankers to separate signal from noise in the inflation data. We in Dallas look at not just
the traditional measure of core inflation that simply excludes food and energy prices, but also a
trimmed mean measure that we think gives a better sense of where trends may be headed. While
an improvement on the traditional measure, it too has some shortcomings, and I believe that over
the long term, the price stability that matters most to the people who pay our salaries, since they
do eat and they do drive, is stability of a comprehensive measure of prices.
Globalization of labor markets also matters for inflation dynamics. Now, one of the key
differences between the current era of globalization and the one that preceded WWI has to do
with the greater restrictions on international movement of labor. We don’t see the same mass
movements of people as characterized the late nineteenth and early twentieth century, and with
more countries providing social safety nets, and the equivalent of “virtual immigration” through
cyberspace, we are unlikely to see such mass migrations ever again. Nevertheless, for some
countries, recent movements of workers have been quantitatively large enough to affect prices.
The recent expansion of the European Union and the freeing of labor mobility has clearly made a
difference to wage and price dynamics in Europe. Whether this is a one-off effect associated with
a permanent reallocation of labor from low-wage to high-wage countries or a longer-term
development whereby workers are more willing to move in search of job opportunities in
response to the business cycle, it is too early to say.
The third key dimension of globalization—that of capital markets—also matters for inflation, but
in a way that fundamentally differs from trade flows and migration. Greater international capital
mobility seems to have a disciplining effect on policymakers worldwide by making it costly to
engage in reckless fiscal or monetary policies. But again, I think there is two-way causation.
Sounder monetary policy in more countries has contributed to the willingness of investors to
venture abroad, but the ease with which capital can take flight has also made it more costly for
central banks to deviate from the new orthodoxy of price stability.
The fourth dimension is the least understood. That is the global assignment of tasks through
nontraditional channels. The U.S. is a high-value-added, services-driven economy; services
represent over 80 percent of our economy. The growth of service sector trade, particularly
through fiber optic cable and satellite connections, poses significant measurement issues. It is not
as if we can just go down to the docks and count containers coming and going to quantify the
impact of service sector trade. And what implication does the increasing trade in tasks with
cheap labor pools around the globe pose for pricing of services and, in turn, for inflation?
Ken’s final point has to do with the skepticism of some academics about the implications of
globalization for monetary policy. He cites a recent important paper by Michael Woodford as a
representative example, so let me conclude with two observations related to that paper. First, I
think there is an element of talking at cross purposes in some of the exchanges that have taken
place on what globalization may or may not mean for monetary policy. I am in substantive
agreement with Woodford that globalization does not undermine the ability of the Fed, or any
other central bank for that matter, to control inflation over an appropriate time horizon, but it
does challenge us—you might say it disciplines us—to conduct monetary policy more prudently.
In today’s world, where investors can move their funds instantly from one currency to another to
avoid depreciation, the price central bankers pay for high inflation is much higher than in the
past. Understanding this, you can see why I am a steadfast inflation-fighting owl.

Globalization also should make us change the way we interpret some of the indicators that have
traditionally played such an important role in monetary policy deliberations. Globalization
indeed warrants the examination of a broader array of data in arriving at monetary policy
decisions. For example, understanding global capacity utilization in an industry may be more
useful than equivalent measures of domestic capacity. Second, the elegance of Woodford’s
exposition notwithstanding, we are still some way from having a consensus model of how the
domestic and international economy works. Enormous progress has been made in recent decades,
due in no small part to the work of scholars like Ken Rogoff and Michael Woodford, but a lot
more remains to be done, and we are spending an enormous amount of time doing it at the
Federal Reserve Bank of Dallas. At times of rapid structural change, it is important to keep an
open mind and challenge old assumptions and paradigms, within a framework of disciplined,
evidence-based scientific inquiry.