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Strategies & Market Trends : Moomin Valley (formerly Troll-free Zone) -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (1592)	8/26/2006 7:17:00 PM
From: RealMuLan	Respond to of 2852

UPDATE 1-Shelf life on globalization price benefits ending Sat Aug 26, 2006 4:38pm ET184 today.reuters.com By Ros Krasny JACKSON HOLE, Wyo., Aug 26 (Reuters) - Central bankers' success in holding down inflation over recent years has reflected the effects of a globalized economy, as well as monetary policy -- but those benefits will not go on forever, economists warned on Saturday. Kenneth Rogoff, an economist at Harvard University, said central banks -- including the U.S. Federal Reserve -- have looked good on controlling inflation partly because of the disinflationary impact of low-priced imports and cheap labor. "Globalization has, by and large, provided an extremely favorable backdrop for monetary policy over the past 20 years," Rogoff said in a paper presented at the Kansas City Federal Reserve's annual retreat in Jackson Hole, Wyoming. Cheap imports from places such as China and Eastern Europe smooth the trade-off between growth and inflation that central banks must juggle through monetary policy. "This flattening, in turn, makes commitments to low inflation more credible and more durable," he said. But Rogoff, a former chief economist with the International Monetary Fund, warned that the forces created by globalization must not be taken for granted -- and neither should the persistent inflow of capital from developing countries into the United States. Discussing Rogoff's paper, Charles Bean, chief economist at the Bank of England, came to a similar conclusion, and added that the disinflationary process may already be shifting into reverse. Bean highlighted the rise in oil prices as global demand has skyrocketed -- and manufacturing has shifted to less energy-efficient countries such as China -- as the "flip side" of globalization. Looking ahead, Rogoff said central banks must prepare for an eventual slowdown or reversal of factors that have worked in their favor for so long. "The core challenge has to be to look ahead to when times might not be so favorable." Addressing a more current issue, Rogoff said central banks might choose to allow temporarily higher inflation when their economies are hit by unfavorable shocks to terms of trade -- or the ratio of the price of a country's exports to the price of its imports -- such as persistently near-record crude oil prices. This is "generally considered best practice by most central banks," he said. However, Bean said such an approach created a risk that central banks could lose valuable credibility in the eyes of the public in the fight against inflation, and urged erring on the side of caution. "To me, the most important issue is not whether there is a theoretical case for such accommodation. Rather it is whether there are likely to be any adverse effects on inflation expectations and credibility from doing so," he said.