Globalization was noted as a major factor in the recent decline in long-term rates in spite of short-term rate increases, according to the Federal Reserve Bank of Dallas' Economic Letter.

In the September issue of the letter titled Globalization's Effect on Interest Rates and the Yield Curve, senior economist Tao Wu identifies three ways in which globalization lowers long-term interest rates; 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, Wu stated. It underscores the importance of formulating monetary policy in a credible, consistent and forward-looking way and better communicating it to the public.

Wu also noted that price stability is creating a positive effect on globalization as producers now match prices with global competition. This leads to higher quality and cheaper goods and services.

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