Global Economic Integration: Opportunities and Challenges--A Summary of the Bank's 2000 Symposium
By George A. Kahn

The increasingly integrated global economy presents policymakers with both opportunities and challenges. Global economic integration is widely thought to improve the allocation of resources, promote technology transfer, and enhance living standards. But, at the same time, economic integration has frequently been blamed for growing trade imbalances, increased financial market volatility, and less effective domestic macroeconomic policies. 

To better understand how policymakers can maximize the benefits from globalization while recognizing the challenges, the Federal Reserve Bank of Kansas City sponsored a symposium entitled, "Global Economic Integration: Opportunities and Challenges," held at Jackson Hole, Wyoming, on August 24-26, 2000. The symposium brought together a distinguished group of central bankers, academics, and financial market experts.

Kahn highlights the principal issues raised at the symposium and summarizes the papers presented and the commentary. Symposium participants agreed that globalization has produced net economic benefits for national economies, and they outlined a variety of approaches for addressing the associated challenges.

How Should Monetary Policymakers Respond to the New Challenges 
of Global Economic Integration?
By Donald Brash

In a presentation at the Federal Reserve Banks of Kansas City's 2000 symposium, "Global Economic Integration: Opportunities and Challenges," Governor Brash of the Reserve Bank of New Zealand highlighted four issues related to global economic integration that affect central banks. First, increasing foreign trade is causing greater integration of countries and regions and thereby increasing the appeal of regional currency zones. Second, growing integration has potentially caused economies to become less inflation prone. Third, global financial institutions are developing at an accelerating rate, raising issues about financial regulation and the transmission of monetary policy. And fourth, the increasing speed with which capital flows around the world is making it more difficult for central banks to achieve domestic objectives. 

Focusing primarily on the last issue, Governor Brash described how monetary policy in New Zealand has responded to increased economic integration. Two key challenges are the heightened response of capital flows to changes in monetary policy and the disruptive effects of exchange-rate cycles to the macro economy. Among the key ingredients to successful management of external or internal shocks in an open economy are "clear, transparent, and credible objectives" and "effective risk management." The specific approach in New Zealand has been to adopt an explicit inflation target and to maintain floating exchange rates and an open capital account.

The P/E Ratio and Stock Market Performance
By Pu Shen

The U.S, stock market entered 2000 with five consecutive years of exceptional gains. The S&P 500 index gained more than 18 percent each of these five years, and its value tripled since 1995. 

Concern has arisen recently that the stock market may be headed for a downturn because firms' share prices have become very high relative to their earnings. Analysts who hold this view point out that, in the past, high price-earnings ratios have usually been followed by slow growth in stock prices. Other analysts argue that history is no longer a true guide because fundamental changes in the economy have made stocks more attractive to investors, justifying a higher price-earnings ratio.

Shen examines the historical relationship between price-earnings ratios and subsequent stock market performance and discusses why history might not repeat itself this time. She finds strong historical evidence that high price-earnings ratios have been followed by disappointing stock market performance in the short and long term. Specifically, high price-earnings ratios have been followed by slow long-run growth in stock prices. Moreover, when high price-earnings ratios have reduced the earnings yield on stocks relative to returns on other investments, short-run stock market performance has suffered as well. Despite this evidence, however, she concludes that we cannot rule out the possibility that these historical relationships are of little relevance today due to fundamental changes in the economy.

The Farm Slump Eases
By Alan Barkema and Nancy Novack

Another big package of government financial aid cushioned the farm slump in 2000 but did little to lift agriculture's spirit. Overall, the industry's major financial indicators stayed remarkably healthy. Farmers delivered more red meat and poultry to supermarkets than ever before, and strong consumer demand in the robust U.S. economy boosted livestock prices and profits. But another big crop swamped still sluggish global markets, and weak crop prices held down farm incomes. In the end, help from Washington propped up the industry's financial indicators for the third consecutive year.

Barkema and Novack report that some signs of improvement in the industry have emerged, but, as in the year just past, the outlook for 2001 hinges on the weather and Washington. Global food consumption has caught up with agriculture's recent production surge, tightening world grain supplies and brightening prospects for farm exports. Nevertheless, normal weather and another big crop are likely to keep U.S. granaries full and crop prices low. Livestock producers could have another good year, but weak crop prices could hold down farm income. As in the past three years, agriculture's prospects in 2001 may rest on financial assistance from Washington.