The effects of globalization on inflation and their implications for monetary policy

Abstract

Policymakers here and abroad cannot lose sight of a fundamental truth: In a world of separate currencies that can fluctuate against each other over time, each country?s central bank determines its inflation rate. If the FOMC were to allow the U.S. economy to run beyond its sustainable potential for some time, inflation would eventually rise. And, this pickup would become self-perpetuating if it became embedded in inflation expectations. Thus, while a better understanding of the implications of globalization will aid in our understanding of inflation dynamics, it is also clear that such developments do not relieve central banks of their responsibility for maintaining price and economic stability.