Global Dimensions of US Monetary Policy

68 Pages Posted: 15 Oct 2019

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: October 2, 2019

Abstract

This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that US monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations. The second channel is the determination of asset returns (including the natural real safe rate of interest, r*) and financial conditions, given integration with global financial markets. The third channel, which is particular to the United States, is the potential spillback onto the US economy from the disproportionate impact of US monetary policy on the outside world. In themselves, global factors need not undermine a central bank's ability to control the price level over the long term--after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.

Keywords: Monetary policy, natural rate of interest, Phillips curve, current account, capital flows, policy spillbacks

JEL Classification: E52, F32, F41

Suggested Citation

Obstfeld, Maurice, Global Dimensions of US Monetary Policy (October 2, 2019). Peterson Institute for International Economics Working Paper No. 19-16. Available at SSRN: https://ssrn.com/abstract=3463172 or http://dx.doi.org/10.2139/ssrn.3463172

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Centre for Economic Policy Research ( email )

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