Working Paper: CEPR ID: DP13887
Authors: Maurice Obstfeld
Abstract: This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that U.S. 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 U.S. economy from the disproportionate impact of U.S. 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; open economy; Phillips curve; natural real interest rate; financial conditions; current account; spillbacks
JEL Codes: E52; E58; F36; F41; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global factors (F69) | domestic inflation (E31) |
| international prices + domestic slack (F16) | domestic inflation (E31) |
| global competition (F23) | responsiveness of inflation to domestic economic conditions (E31) |
| global financial market integration (F30) | natural real safe rate of interest (r) (E43) |
| global market conditions (F61) | US monetary policy effectiveness (E52) |
| US monetary policy (E52) | domestic economic conditions (E66) |
| US monetary policy (E52) | tradeoff between price stability and low unemployment (E31) |