By Morten Spange of the Bank's Monetary Assessment and Strategy Division and Chris Young of the Bank's International Economic Analysis Division.
The integration into the world economy of labour-abundant economies - such as China, India and Eastern European countries - has had far-reaching effects. This is of interest to policymakers, who need to understand the channels by which globalisation is affecting the macroeconomy. This article uses an economic framework to analyse globalisation. It outlines the impact predicted by an economic model on key macroeconomic variables such as interest rates, wages and relative prices. The article then compares these predictions with the evidence, and finds that although many macroeconomic variables have responded as projected, some - in particular real interest rates and current accounts - have not.