I always thought that decoupling was a myth.

As reported by Bloomberg News

Increasingly, globalization is blurring economic boundaries. On the inflation front, for example, we have extensive economic playbooks that tell us how to treat the wage–price spiral or cost-push forces in a closed economy. In a closed environment, one would ordinarily expect that a weakening economy would lead, in turn, to a diminution in price pressures. But we have less experience with prescribing policy in an open economy where demand-pull forces come from beyond our borders—such as the burgeoning demand for commodities and food from rapidly growing and newly consequential economies like China, India, Latin America and the countries liberated from the oppression of Soviet communism. These faraway places play an ever-increasing role in determining prices here at home.

Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations.  These policies have had huge benefits--not only the achievement of low and stable inflation but also an improvement in the overall performance of the economy. ...  Globalization, however, may have helped reduce inflation in more-subtle ways.  By fostering increased interactions among central banks, academics, and the public in many different countries, globalization has helped spread a common culture that stresses the benefits of achieving price stability.  The resulting increased focus on price stability has been a key reason for the reduction of inflation worldwide.   

China has officially recognized the need to increase its domestic spending and scale back its reliance on exports.  Measures that could help achieve these goals include further reforms of the financial sector; increased government spending on infrastructure, environmental improvement, and the social safety net; and currency appreciation. 

As globalization continues and the world economy evolves, more creative destruction will impact your states. That is the bad news because job destruction creates political pressures for transition programs at best and protectionist or retaliatory responses at worst. The good news is that the creative side of this inexorable phenomenon, properly managed, results in better jobs, higher living standards, lower prices and increased prosperity.

Growth in U.S. exports in coming years will play a critical role in creating better jobs. U.S. exporting firms on average enjoy higher productivity than those that sell only into the U.S. internal market. Because export opportunities are especially great to countries abroad that are growing rapidly, we need to encourage that growth, or at least not interfere with it. Imports into the United States from high-growth countries help to encourage growth abroad. We have a common interest with all the countries of the world in promoting trade liberalization. Increasing liberalization is central to creating better jobs around the world, including here at home. In our approaches to trade issues, we need to shift attention from protecting workers against imports to protecting exports. That will be the key to a more prosperous future.

In the diverse Southeast economy—with the pressure of globalization and technological change—the required skill set will change constantly. We hear often that a person who will spend 40 years in the labor force may have not only multiple jobs but also three or four distinct careers. For many, personal retooling is not just a choice—it's a matter of survival. Fortunately, state leaders are well positioned to ease this sometimes painful process by investing in programs to foster worker retooling.

I have argued that globalization, deregulation, and financial innovation, in part spurred by recent experiences of high inflation, have fostered currency competition that has led to improved central bank performance and, hence, the reduction of inflation worldwide. The resulting enhancement of central bank governance and credibility has allowed the development of long-term bond markets in many countries and the flattening of yield curves around the globe.

I believe that the factors of globalization, deregulation, and financial innovation, arising partly in response to episodes of high inflation, have effectively eroded the central bank monopoly on the provision of monetary services and have enhanced global competition among currencies. These changes have, in turn, altered the incentives for central banks to behave badly and for finance ministries to use central banks as "piggy banks" to finance their fiscal policies. The resulting constraint on monetary policy, combined with increased public understanding of the costs of inflation, have led to institutional changes in central bank governance that bolster their credibility for maintaining price stability in the future. Thus, improved central bank performance and credibility are the consequences of this combination of factors.

Globalizing the domestic financial system by opening financial markets to foreigners encourages financial development and growth in wealth in two ways.  First, opening financial markets to foreign capital directly increases access to capital and lowers its cost for those with productive investments to make.  ....  [The] second benefit of financial globalization:  Opening markets to foreign financial institutions promotes reforms to the financial system that improve its functioning.     

The common thread among these 10 factors is that they all raise productivity’s level or its growth rate—or both.  Higher productivity lowers costs.  Lower costs restrain inflation, the bête noire of any progressive economy and the bane of Federal Reserve officials and central bankers everywhere.  In this fundamental way, globalization raises the economy’s speed limit, allowing policymakers to relax a little and let the economy expand at rates that might once have been considered unsustainable.  In a globalized world, faster growth need not carry the same inflationary implications it does in a closed world.  

We're accustomed to finding the roots of inflation in too much money chasing too few goods. For too long, however, we've brushed aside the issue of whose goods. Just our own? At one time, maybe -- but not in today's globalized economy.

In teaching inflation's causes and cures, economics professors have for generations invoked the famous Equation of Exchange. With mathematical clarity, it tells us that prices are directly linked to the amount of money in circulation and the speed at which we spend it. So print money faster than the economy grows and the value of a dollar will fall.

Luckily, transaction velocity remains relatively stable over the years, allowing us to conclude that inflation mainly depends on money growth, an instrument of policy, and the pace of economic expansion.

But we're now in an age of globalization. Freer movement of goods, services, people and ideas stretches production to the far reaches of the planet. China, India and other newcomers with huge labor resources and productive capacity are becoming important players. Each year, the part of our economy isolated from global competition becomes smaller.

It seems unlikely that inflation would remain a purely domestic affair in our globalizing economy. Research by a handful of economists like Harvard's Ken Rogoff has found important links between foreign production and U.S. inflation. The empirical studies are changing some minds on the subject of globalization and inflation, but we also need new doctrine -- an equation of exchange for the new economy.

[O]ne recent study even purports to show that foreign output gaps are more important in explaining domestic inflation in industrialized countries than domestic factors (Borio and Filardo, 2006). However, this result has been challenged by the Federal Reserve staffers, who find that estimates to this effect are fragile.⁷

The forces behind currency competition that have bolstered incentives for central banks to maintain low inflation and so have helped anchor inflation expectations are likely to persist and perhaps strengthen.  The ease with which funds move across capital markets should continue to ensure that the responses to inflationary central bank policies will be swift and significant.  The resulting incentives provided by currency competition should continue to foster relatively low far-forward nominal interest rates in many countries.  As long as capital markets remain open and people remain aware of the costs of high inflation policies, I believe that the forces behind the low level of long-term interest rates and hence the general flatness of yield curves around the globe will tend to persist for some time.  

Third, liquidity in U.S. markets also increased significantly in recent years due to increased international capital flows. These flows to the United States from global investors lead to higher liquidity by increasing capital available for investment and facilitating greater transfer and insurability of risk. A recent report by McKinsey & Company estimated that aggregate international capital flows amounted to $6 trillion in 2005--almost triple the volume a decade earlier--and that one-quarter of the worldwide volume flowed through the United States.