For immediate release: September 26, 2006
Globalization’s Effect on Interest Rates Subject of Dallas Fed’s Economic Letter
DALLAS—Globalization is a major factor in the recent decline in long-term interest rates amid short-term rate increases, according to the September issue of the Federal Reserve Bank of Dallas’ Economic Letter.
In “Globalization’s Effect on Interest Rates and the Yield Curve,” senior economist Tao Wu finds that globalization lowers long-term interest rates in three ways: reducing inflation, stabilizing business cycles and developing global financial markets.
“Globalization’s impact on the relationship between short- and long-term interest rates poses potentially formidable challenges for central banks around the world,” writes Wu. “It underscores the importance of formulating monetary policy in a credible, consistent and forward-looking way and better communicating it to the public.”
Price stability is also positively affected by globalization, according to Wu. Producers must now match prices from global competition, leading to higher quality and cheaper goods and services.
The September 2006 issue of Economic Letter can be found at www.dallasfed.org.
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