Speech by Governor Liikanen: "Globalization: Declining Risks but Increasing Uncertainty?", Buenos Aires

Governor Erkki Liikanen Buenos Aires, 4 June 2007

Bank of Finland

2007 Money and Banking Conference hosted by the Central Bank of Argentina

"Monetary Policy Under Uncertainty"

Session on Underlying Forces in the Global Economy

Speech by Governor Liikanen: "Globalization: Declining Risks but Increasing Uncertainty?"

http://www.bof.fi/en/suomen_pankki/ajankohtaista/puheet/2007/el_puhe04062007.htm

Introduction

Globalization is the big story of our times. Forces of globalization change the domestic inflation process and the way in which monetary policy measures are transmitted in the domestic economy.

The uncertain nature and magnitude of these changes makes the job of the central bankers more demanding. But at the same time, globalization has helped central bankers by exerting some dampening effect on prices.

On balance, the low and stable inflation we have witnessed in recent years gives confidence that central bankers can cope with this uncertain and changing operating environment as long as the process of globalization remains orderly. Therefore, I will not today talk much about how globalization is changing the domestic inflation process and the transmission mechanism of monetary policy.

Instead, in my remarks today, I will mainly talk about how globalization is changing the landscape of risks and what this implies for central banks and other policymakers. In particular, I will discuss the somewhat paradoxical phenomenon of a broad-based decline in risk premia at the time when uncertainty, i.e., those risks that cannot be readily quantified, may in fact be increasing.

Globalization: the big picture

It is often claimed that there is nothing new about globalization. While this may be true in some sense, it seems to me that the current phase of globalization differs markedly from the previous ones in its extent, speed, intensity and impact.

It is not possible to pinpoint the exact start of the current phase of globalization. But still, we can say that the demise of centrally-planned economies – most notably the internal transformation of China and the dissolution of the Soviet Union – unleashed the forces of globalization which had been building up during the 1980's.

The obvious result of this was that the former communist block countries opened up and became integrated into the world economy. The failure of the centrally-planned economic models profoundly changed the political landscape in already democratic countries. Specifically, it enabled and prompted them to adopt increasingly market-oriented policies conducive to competition and improvements in productivity.

The point which I want to stress here is that, although globalization is nowadays often seen as an inevitable and irreversible "force of nature", its present phase was triggered by political events and needs some global institutions and international political support to be sustained.

If the collapse of central planning was the main trigger, then rapid advances in technology have been the main driving force behind globalization. In particular, the explosive development of information and communication technologies has played a central role. By reducing dramatically the cost of transporting and sharing information and services, it has made the world more interconnected and interdependent than any reasonable observer could have thought possible just 20 years ago.