U.S. monetary policy in an . . .

• Main Authors: Richard N. Cooper, Jane Sneddon Little
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Subjects: North Atlantic
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.153.5424; http://www.economics.harvard.edu/faculty/cooper/files/Cooperli.pdf

U.S. monetary policy has a purely domestic mandate. The Federal Reserve’s task is to promote “maximum employment, price stability and moderate, long-term interest rates ” within the United States. 1 Or, as Arthur Burns put it in 1973, “American monetary policy is not made in Paris; it is made in Washington. ” 2 That said, this paper will argue that global developments have played a significant role in setting the focus and practice of U.S. monetary policy in the years since Frank Morris became President of the Federal Reserve Bank of Boston. When Frank Morris joined the Fed in 1968, the Bretton Woods system – based as it was on the dollar’s unsustainable link to gold – was on the verge of collapse. Even so, the U.S. dollar remained the only viable international transactions currency at that time, and the financial “world ” encompassed a mere handful of nations edging the North Atlantic, plus, grudgingly, Japan. Today, of course, the major currencies are floating, the euro is increasingly used as a transactions currency, and investor horizons have widened to include emerging markets on every continent. Within this changed setting, the U.S. economy has itself become considerably more open to international trade and investment flows. Thus, promoting U.S. price stability and maximum sustainable growth has increasingly required taking global developments into account. Usually, these developments have been taken as “givens,” * Maurits C. Boas Professor of International Economics, Harvard University, and Assistant Vice President and Economist, Federal Reserve Bank of Boston, respectively. Oksana Nagayets and Matthew LaPenta provided excellent research assistance. Luci Rexroad produced the banking structure data. The authors are also grateful to Geoffrey M. B. Tootell for sharing his reaction function model and accompanying data and