Globalisation is indeed a subject of great interest within the Eurosystem. The reason for such interest is clear when we consider our knowledge of the different channels through which globalisation is affecting key elements of the monetary policy framework such as the inflation formation process and the monetary transmission mechanism, is still rather limited Globalisation is the term used to describe the growing interdependence of economies via trade, production and financial market linkages. It has accelerated in the last 20 years mainly for two reasons. Firstly, because of the boom in the use of information and communication technology, that has reduced the costs of transporting goods, services and information across the globe. This process has been accompanied by a strong rise in foreign direct investment and this, in turn, has led to new ways of organising and doing business: production processes have become increasingly internationalised as companies have established affiliates abroad to gain access to foreign markets and reduce input costs. The second reason for globalisation was the opening-up of emerging countries to international trade and production. The greater involvement of emerging Asia in world trade as well as Central and Eastern Europe following the collapse of the Soviet Union has intensified competition and caused major changes in the pattern of global trade. The recent acceleration of globalisation has occurred in parallel with a decline in the level and volatility of global inflation. Although the more general acceptance of price stability-oriented monetary policy frameworks, fewer negative shocks (so-called "good luck'), technological progress, fiscal discipline and structural reforms have all played a part in reducing inflation rates and macroeconomic volatility over the past two decades, globalisation is often included as a factor. Globalisation and its implications for domestic price developments raise several issues for monetary policy. Has monetary policy become less effective in a globalised world? Is the objective of maintaining price stability still relevant in the wake of globalisation? Do central banks have tools that are efficient enough to maintain price stability in a globalised world? How should monetary policy be conducted under these new circumstances? These are the questions this article intends to response. But to judge the relevance of these questions, we first have to consider the impact globalisation might have had on the variable that is most important from a monetary policy perspective: domestic inflation. For this reason, it also focuses on what theory and empirics tell us about the effects of globalisation on inflation.
