World Money and U.S. Inflation: Part I
VICTOR A. CANTO AND ALEX WINTERS
The ubiquitous nature of inflation and recession across countries in various degrees in recent years justifies labeling the phenomenon global rather than national. 1 While talk of economic "interdependence" is widespread, economic policy is still perceived as national in scope. Economic policy initiatives proceed on the premise that economies of different nations are, at best, only loosely connected.
This isolationist frame of mind has been most notable in the design of policies to control inflation. Experience, however, lends credence to the notion that domestic factors alone are not sufficient to explain domestic inflation. Moreover, policy implications that emanate from a worldwide view of inflation are very different from those resulting from a closed economy perspective.
Whether true or not, one can imagine that the monetary authorities could control a closed economy's money supply--say, demand deposits plus currency. In the world economy, however, control, as a practical matter, borders on inconceivable. The role of any one country's monetary authority--such as the U.S. Federal Reserve Board--wanes dramatically in the perspective of the world.
Money is, after all, one of the easiest commodities to move across national borders. Banks and other financial institutions operate in numerous U.S. and foreign locations. Even when the foreign operations are not direct subsidiaries, correspondent relationships and other close associations have been developed. Money markets, not only within the United States but also in the world economy, are closely interrelated by this vast financial network. 2 The advent of floating