Expectations may be more solidly anchored, which would lessen the impact of the output gap on current inflation. It is also possible that, as a result of structural reforms, the NAIRU has decreased in many countries in recent years, thus giving the "optical" impression of a horizontal Phillips curve during this period. In a broader sense, globalisation itself may also be responsible for the flattening of the Phillips curve. In an open economy, domestic demand changes can easily be satisfied through increased imports. As a consequence, domestic inflation may become less sensitive to the domestic output gap and more sensitive to global tensions on production capacities. Overall, these developments have made it easier for central banks to bring down inflation without real costs to the economy. But it is clear, today, that these effects are being reversed. The prices of oil, food and other commodities are now increasing fast. There might be three reasons for this rise (the importance of which is currently hotly debated): first a supplydemand imbalance; second, the emergence of commodities as an asset class, attracting substantial flows into commodity funds; and, finally, the use of commodities as a hedge against inflation or dollar depreciation. In addition, while labour supply in emerging countries will remain abundant, it is not all that clear that it will remain cheap. Indeed, we are currently seeing an increase in export prices in emerging countries, which translates into higher import prices for developed economies. In short, the world environment has become very inflationary.
The current financial turmoil is here to remind us that financial innovation is not a smooth process. An appropriate knowledge of the mechanisms through which monetary policy affects the economy is of crucial importance for central banks. Financial innovation affects these mechanisms by altering the channels through which monetary policy operates. Drawing on some lessons from the current turmoil, I would like to make four points. First, securitisation has created new uncertainties in the transmission channels of monetary policy. It may have weakened some channels and strengthened some others. At least in normal times, financial innovation significantly weakens the bank-lending channel. Securitisation gives firms broader access to capital markets and, as such, makes them less dependent on bank funding. Similarly, banks may be more able to issue debt securities and less dependent on the constraint of funding themselves with secured deposits. At the same time, however, securitisation strengthens the “direct” transmission channel through which interest rates operate, since a great number of financial intermediaries are more dependent on liquidity and on its price. Second, financial innovation – to the extent that it makes it easier to take risks and encourages the “search for yield” – may have increased the impact of monetary policy because, in such an environment, risk premia are highly procyclical and move in tandem with interest rates. Third, this same procyclicality of “risk taking” can lead to booms and busts, when investors’ appetite for risk changes.