What I have elsewhere referred to as “currency competition” may be a driving force behind these changes in inflation outcomes and expectations and may be reflected in low nominal long-term interest rates and the flattening of yield curves. 5 I’d like to briefly review what I mean by currency competition.
A confluence of four factors – deregulation, globalization, financial innovation, and the public’s increased understanding of the costs of inflation – has fostered a form of competition among currencies. That competition, in turn, has led to improved central bank performance and thereby contributed to the recent conquest of worldwide inflation.