BIS Says Globalization Is Answer to Inflation Puzzle
September 22 2017 - 11:09PM
Dow Jones News
By Paul Hannon
Globalization is the most likely explanation for surprisingly
low rates of inflation, suggesting that central banks should be
patient in seeking to meet their targets and avoid providing too
much stimulus, a senior official at the Bank for International
Settlements said Friday.
The bank's advice comes as the global economy has accelerated
this year, while unemployment rates continue to fall across
developed economies. Despite that, inflation rates across the Group
of 20 largest economies have eased and stand at levels last seen in
2009, when the world was just starting to emerge from the sharp
economic downturn that followed the global financial crisis.
Central bankers are puzzled at the breakdown in the economic
relationship between activity and prices.
Federal Reserve Chairwoman Janet Yellen Wednesday acknowledged
the inflation shortfall had proved more persistent and was more
broad-based than officials had anticipated. "I can't say I can
easily point to a sufficient set of factors that explain this year
why inflation has been as low," she said.
Claudio Borio, who is chief economist at the industry
association for central bankers, thinks the BIS has nailed the
culprit: Globalization, a process that took off from the 1980s and
has seen many large companies spread their activities and
associated jobs across an increasing number of countries, creating
what are known as "global value chains."
"One would expect the entry of lower-cost producers and of
cheaper labor into the global economy to have put persistent
downward pressure on inflation, especially in advanced economies
and at least until costs converge," he said in a speech.
The BIS has advanced this view with increased confidence over
recent years, citing a mounting body of evidence from its own
research and that of other economists. Some leading central bankers
are now giving it greater credence. In a speech Monday, Bank of
England Gov. Mark Carney said globalization has weakened the link
between spare capacity in national economies and their inflation
rates.
Mr. Borio said the influence of globalization on inflation has
implications for central-bank policy.
"To the extent that disinflationary pressures result from forces
such as globalization or technology, they should be generally
benign: They would reflect favorable supply side developments as
opposed to damaging demand weakness," he said. "At a minimum, this
suggests lengthening the horizon over which it would be desirable
to bring inflation back toward target."
In the current context, that would mean providing less stimulus
to the economy than many central banks are now offering.
Mr. Borio offered another argument for running tighter policies,
citing BIS research that suggests central banks have a much larger
influence on real, long-term interest rates than they like to
admit. Rather than being determined by the balance between savings
and investment, Mr. Borio said an examination of the record from 19
countries going back to the 1870s suggests real interest rates have
fallen over recent decades because central banks have kept their
policy rates low. Central banks say there is a "natural" rate of
interest determined by the savings and investment balance that they
simply try to follow.
"We may need to adjust monetary policy frameworks accordingly,"
he said. "Here, I highlighted the desirability of greater tolerance
for deviations of inflation from point targets while putting more
weight on financial stability."
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
September 22, 2017 22:54 ET (02:54 GMT)
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