How Should Monetary Policymakers Respond to the New Challenges of Global Economic Integration?

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An address by Donald T Brash, Governor of the Reserve Bank of New Zealand to a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming on Saturday, 26 August 2000.

Introduction

There are, of course, many aspects of global economic integration which have quite direct and immediate implications for the way in which central banks go about their work. Four issues in particular stand out.

First, economies are becoming increasingly integrated through trade, particularly at a regional level. As our conception of "the economy" takes on less and less of a national dimension and more and more of a regional dimension - whether it be the EU, NAFTA, or ASEAN - it is not surprising that parallel questions arise about whether currency arrangements should move in a similar direction, that is, toward enlarged common currency areas. We have already seen the advent of a common currency in much of western Europe; there has been increasingly widespread discussion about the pros and cons of dollarisation in the Americas; and there has even been some discussion of a common currency for East Asia. In my own country, there appears to be quite strong support within the business community for forming a common currency with Australia, and some support also for dollarisation.

Secondly, questions have also arisen about whether the increasing openness of economies is resulting in the world becoming less prone to inflation. Does the exposure to global competition help to suppress inflation pressures, and is this one of the factors behind the so-called "new paradigm", in which the United States in particular appears able to enjoy non-inflationary growth at rates previously thought impossible?

Thirdly, we are seeing an accelerating trend towards genuinely global financial institutions, including enormous entities such as Citicorp, HSBC, Deutsche Bank, and UBS. This is raising some issues, including, for example, whether the transmission of monetary policy in national banking systems dominated by foreign owned banks is somehow different from where banks are predominantly local in ownership, and whether the regulatory framework is appropriate to dealing with these global behemoths.

Fourthly, in today's globalised markets capital moves in amounts, and at speeds, that complicate the management of monetary policy directed to achieving internal macro objectives. Most now accept that where there are no restrictions on capital flows, it is not possible, at least not beyond quite narrow limits, to simultaneously direct monetary policy to an internal objective (such as an inflation target) and an external objective (such as an exchange rate target).

In my few minutes, I will focus mainly on the fourth of these issues, as it has been the most challenging issue facing us in New Zealand. Having said that, it will also be evident that the issues I have listed overlap and interact to some degree.

Substantial current account imbalances, and associated capital flows, have always been a feature of the economic landscape of course. However, with the liberalisation of private capital flows, and increased trading in marketable securities, gross private capital flows during the last decade orso have been larger, faster, and perhaps more "concerted", than in the preceding decades (and probably at any time in the history of modern central banking). I don't think there is any need at this point in proceedings to try to support that proposition with data. But let me just quote a few numbers to illustrate the point in the case of New Zealand.

In 1990, the government's net foreign-currency debt was equivalent to 22 percent of GDP By 1998, that net foreign-currency debt had fallen to zero.

On the other hand, over the same period, non-resident holdings of New Zealand government New Zealand dollar bonds rose from 14 percent of the total on issue to 65 percent of the total on issue. …