1) The document summarizes a presentation given by William White about globalization and the convergence of inflation rates. It discusses how inflation has fallen globally and become less volatile. It also explores several potential explanations for these trends, including effective central bank policy, globalization of markets, and the "savings glut" hypothesis. 2) The presentation is divided into four parts. The first discusses the facts about declining inflation and volatility worldwide. The second evaluates alternative explanations for these trends. The third considers prospects for the future and potential financial imbalances. The fourth discusses implications for monetary policy. 3) In conclusion, the presentation argues that no single factor can fully explain recent inflation trends. Rather, a combination of forces, including global

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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

2. A presentation in four parts
The facts about inflation
Alternative explanations
Prospects and exposures
Implications for policy regimes

3. Part 1: The facts
Inflation has fallen globally
So too has inflation volatility
And the inflation process has changed

4. Inflation and volatility have fallen

5. 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

6. 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!

7. 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

8. Real interest rates and credit growth

10. 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

11. Globalisation?
Loss of pricing power
But still high profits
Wages take the hit

12. Loss of pricing power

13. But wages take the hit

14. Wage suppression
Through diverse channels
(1) Immigration
(2) Import penetration
(3) Relocation and contestability

15. 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

16. 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!

17. Consider a global model
Aggregate supply increases
As aggregate demand decreases
And easy money fills the gap, globally
Due to essentially fixed exchange rates

18. 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

19. Part 3: Prospects and exposures
Will low inflation continue?
Are “financial imbalances” a threat?
Could deflation be the end game?

20. 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?

21. Are financial imbalances” a threat?
What is meant by financial imbalances?
Sources of the problem?
Evidence of imbalances today?
Exposures?

22. 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

23. Sources of the problem?
Very low real interest rates
Repeated use of asymmetric easing
A more “elastic” credit system
In sum, liquidity!

24. 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

25. 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

26. Could deflation be the end game?
Global recession with initially stable prices
Could lead to deflation
Which might or might not be a problem

27. 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

28. Thank you!

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