Through the evolution of international trade practices, global economies are becoming more integrated.
So said Bank of Canada Governor Stephen Poloz in a recent lecture on Canada–US relations, which was given at Western Washington University. He finds increasing global integration has been driven by pacts such as the North American Free Trade Agreement and by the rising trade penetration of emerging markets, such as China.
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Poloz stresses that increased trade has implications for the conduct of monetary policy. In particular, he says global integration can affect the economic models that policymakers rely on; this can reduce an economy’s sensitivity to exchange-rate fluctuations, while making domestic inflation more dependent on international developments.
Plus, says Poloz, Bank of Canada analysis finds that maintaining inflation targets can be more challenging when global economies are more closely tied.
As a result, monetary policy actions may be less effective at stabilizing economies going forward. So, says Poloz, “policymakers need to acknowledge that international developments will have an influence on their economies” when predicting growth and making moves.
The Bank of Canada’s lecture was made in honour the late Paul Storer, a former economics professor at Western Washington University who worked with Poloz at the Bank of Canada.
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