Global Dimensions of U.S. Monetary Policy

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 when 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 in integrated global financial markets. The third channel, particular to the United States, is the potential spillback onto the U.S. economy from the disproportionate influence 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-level path.