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During his term as Managing Director, Michel Camdessus oversaw the second great wave of globalisation.The Berlin Wall fell, capital controls were liberalised, the euro was constructed, and China prepared to jointhe WTO. Product and financial markets became increasingly integrated, with trade growing at an annualrate of 10% and capital flows of 20%. The effective global labour force doubled, and more than a billionpeople were lifted out of poverty.
Central banks are now grappling with one consequence of such enormous achievements – the impact ofglobalisation on inflation.
All central banks must consider the cyclical relationship between global slack and domestic inflation; thedegree to which secular forces from globalisation affect local inflation dynamics; and how global factorsinfluence the stance of domestic monetary policy itself. And now some central banks may need to considerthe implications for price stability if the process of globalisation were to slow or go into reverse.
These issues are particularly relevant to the Bank of England as the UK inflation outlook will be importantlyinfluenced for some time by a process of de-integration under Brexit.
Today, I would like to draw on this example to illustrate how global factors influence domestic inflationdynamics and the ability of central banks to achieve price stability.
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