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Globalization, EU economy, energy prices and Chinese banking reform topics of Dallas Fed's Southwest Economy

For immediate release: August 16, 2005

DALLAS—The latest issue of the Federal Reserve Bank of Dallas’ Southwest Economy examines globalization, the EU economy, energy prices and Chinese banking reform.

In “Globalization and Monetary Policy,” Vice President Mark Wynne provides a historical perspective on globalization.

In economic terms, globalization is not a new phenomenon. Goods, services and capital flowed just as readily across national borders pre–World War I as they do today. What’s changed is the monetary standard.

“There is general agreement among economists and central bankers alike that monetary policy should be rule based, although there is less agreement as to what form desirable rules should take,” Wynne writes.

He also raises the issue of globalization’s effect on inflation, noting that debate continues on whether the lower inflation most countries have experienced in recent years is the result of increasing world trade or central bankers learning their limits when it comes to fine-tuning the economy.

Wynne says future Dallas Fed publications will examine in greater depth how monetary policy should be conducted in a more globalized world.

In “European Economic Integration: A Conflict of Visions,” Senior Economist Jason L. Saving says that integration of the European Union using a French or German economic model would hamper the European economy.

Economists generally favor further economic integration because of the benefits of free trade and free markets. But economic integration can instead take the form of protectionism and excessive regulation, which hinder growth instead of promoting it, according to Saving.

While either course is consistent with the ever-closer union to which EU leaders have committed, only one would enable the EU to take its place among "the world's most dynamic and fastest-growing economies."

This is the conflict of visions that Europe currently confronts, Saving writes. "If Europeans wish to be less prosperous in the future so they can be more equal today, economics cannot call the wisdom of that decision into question. But economics can reveal its consequences."

In “Natural Gas Pricing: Do Oil Prices Still Matter?” Stephen P. A. Brown examines the linkage between natural gas and crude oil prices. Brown is director of energy economics and microeconomic policy analysis.

Although natural gas and refined products seem to be used less often as substitutes for each other, Brown finds that “oil prices do still matter for natural gas prices, but the old rules of thumb relating natural gas prices to those for oil are of limited usefulness.”

“When we take into account the normal seasonal variation in natural gas prices and the amount of natural gas in storage, however, we find compelling evidence that U.S. natural gas prices continue to be related to those for crude oil. The relationship is relatively stable and complex,” he writes.

In “Foreign Exchange Policy and Banking Reform in China,” Assistant Economist Dong Fu explains why the country must quickly resolve problems with its fragile banking system if it is to have a more flexible foreign exchange policy.

Fu explains that China’s four main state-owned commercial banks are technically bankrupt because of low profitability and large bad-loan portfolios.

Only when the banks are adequately capitalized, fully commercialized and efficient in their operation will they be able to handle a flexible foreign exchange regime, according to Fu.

Find the July/August issue of Southwest Economy online at


Media contact:
James Hoard
Phone: (214) 922-5307