Conducting Monetary Policy in a Global Economy

By Parry, Robert T. | Business Economics, October 1998 | Go to article overview

Conducting Monetary Policy in a Global Economy


Parry, Robert T., Business Economics


In the past thirty years the global economy has undergone tremendous change and become increasingly more integrated. World trade has grown much faster than world output, and international capital flows have expanded still more rapidly.

The increased integration of international markets for goods and services is attributable to a steady liberalization of trade barriers since World War II, falling costs of transportation, and the spread of production technology across national boundaries. As a result of these developments, households and businesses in all countries have come to depend increasingly on foreign sources of supply for consumption goods and raw materials. Firms no longer view their markets as being constrained by national borders; instead, they look to foreign nations as potential markets. As new technology spreads throughout the world, production location decisions are determined more by production costs, and production activity and its associated flow of components have been dispersed around the world.

At the same time, increased integration of international financial markets has been prompted by technology, ingenuity, and deregulation. Technological advances in communications and computers have revolutionized the speed with which financial information about asset returns and risk is collected, processed, and disseminated throughout the world. Advances in the understanding of finance have helped accelerate the innovation of new instruments to manage financial risk. In addition, wide-ranging deregulation of domestic and cross-border financial flows has allowed greater scope for competitive forces in financial markets and spurred the growth of various forms of financial intermediation.

Increased international integration of both goods and financial markets has had an impact on the environment for monetary policy as well. It has expanded the range of shocks that must be accounted for when implementing domestic monetary policy. It also has affected the channels through which monetary policy is transmitted. It has not changed the appropriate goal of domestic monetary policy, however. That goal remains domestic price stability; as extensive research and harsh experience have shown, controlling inflation is the main thing monetary policy can, and should, do.

EXPOSURE TO FOREIGN SHOCKS

The closer integration of cross-border capital and goods markets implies that foreign shocks become additional sources of disturbance to the domestic economy and therefore a concern to domestic policymakers. For example, foreign real demand shocks, such as an unexpected decline in the overall level of economic activity abroad, can dampen the demand for domestic exports and act as a drag on the domestic economy. Foreign real supply shocks, e.g., a decline in the availability of world oil resources, can reduce domestic productive capacity and raise the overall domestic price level. Foreign nominal shocks, such as cyclically contractionary monetary policy and temporarily higher interest rates abroad, can lead to capital outflows and temporarily higher domestic interest rates.

As domestic markets become more integrated with those abroad and the relative magnitude of foreign transactions increases, these shocks play a greater role in the short-run transmission to domestic output and inflation. For example, foreign real demand and supply shocks now have a bigger effect on the U.S. economy than they did when exports and imports were smaller relative to GDP. And greater international financial linkages mean that the U.S. financial sector is more exposed to foreign nominal shocks than it once was.

Does the increased vulnerability to foreign shocks, real or nominal, imply that domestic interest rates and, hence, domestic prices are exposed to undue influence from abroad? Does this linkage then limit the ability of the Federal Reserve and other central banks to conduct monetary policy in pursuit of price stability? …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Conducting Monetary Policy in a Global Economy
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.