Can domestic monetary policy still control domestic interest rates and so stabilize both inflation and output?
(4) Are there other ways, besides possible influences on inflation and interest rates, in which globalization may have affected the transmission mechanism of monetary policy? Has globalization led to a decline in the sensitivity of inflation to domestic output gaps (the difference between actual and potential output) and thus to domestic monetary policy? In recent years, we have clearly witnessed a decline in the sensitivity of inflation to the domestic output gap (a flattening of the Phillips curve) in the United States and other advanced countries (Borio and Filardo, 2007; International Monetary Fund, 2006; Ihrig and others, 2007; Pain, Koske, and Sollie, 2006). Globalization might make inflation less responsive to rising domestic resource utilization because households and businesses can go outside the country to buy goods and services, so there will be less pressure for domestic prices to rise. Another way of thinking about this point is to recognize that globalization might reduce
