Speech by Vice Chairman Fischer on U.S. monetary policy from an international perspective | Summary and Q&A

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November 11, 2016
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Federal Reserve
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Speech by Vice Chairman Fischer on U.S. monetary policy from an international perspective

TL;DR

U.S. monetary policy actions have significant spillover effects on foreign economies through exchange rates, output, and interest rates.

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Key Insights

  • ☠️ U.S. monetary policy actions have significant spillovers on foreign economies through exchange rates, output, and interest rates.
  • ❎ The impact of U.S. monetary policy on foreign economies can be both positive and negative, depending on economic fundamentals and policies in those countries.
  • 🏦 Central banks in foreign economies can take measures to mitigate the adverse effects of U.S. monetary policy, such as through effective communication and complementary policy actions.
  • ☠️ The natural rate of interest (r*) in the U.S. and other economies has decreased significantly, which reduces the room for expansionary monetary policy and may lead to challenges in achieving policy targets.

Transcript

RODRIGO VERGARA. As you all know, the keynote speaker of this conference is Stan Fischer. Unfortunately, Stan could not be here with us in person, so he will give his speech by video conference. Stan Fischer needs no introduction but let me just refer briefly to his outstanding professional career. He's currently Vice Chairman of the Board of Gover... Read More

Questions & Answers

Q: How does U.S. monetary policy affect foreign economies?

U.S. monetary policy affects foreign economies through exchange rates, output, and interest rates. Changes in U.S. policy can lead to currency appreciation or depreciation, which in turn affects the competitiveness of foreign goods and services. Changes in output and interest rates in the U.S. also have ripple effects on the global economy.

Q: Is it possible for U.S. monetary policy to generate undesirable effects on the global economy?

While U.S. monetary policy is primarily focused on domestic objectives, such as inflation and employment, it can have unintended consequences for the global economy. For example, tightening of U.S. monetary policy can lead to financial market turbulence, capital outflows from emerging market economies, and exchange rate depreciations. However, central banks in foreign economies can take measures to mitigate these effects.

Q: How do foreign economies react to U.S. monetary policy normalization?

Foreign economies have different reactions to U.S. monetary policy normalization depending on their economic fundamentals, exchange rate regimes, and capital account openness. Economies with more open capital accounts and stable exchange rates tend to experience larger positive effects on their GDP from U.S. monetary policy actions. On the other hand, economies with flexible exchange rates and less open capital accounts may face challenges in managing the spillovers from U.S. monetary policy.

Q: Will there be another "taper tantrum" when the Fed raises interest rates?

The likelihood of another "taper tantrum" depends on how markets and the global economy react to the Fed's interest rate hikes. The Fed has communicated its plans and intentions to gradually raise interest rates, which should mitigate the risk of disorderly market conditions. However, there is always uncertainty in financial markets, and unexpected events can lead to heightened volatility and spillovers.

Summary & Key Takeaways

  • U.S. monetary policy actions have a wide-ranging impact on the global economy through various channels, such as exchange rates, output, and interest rates.

  • Foreign economies are affected differently by U.S. monetary policy actions, and the spillovers can be both positive and negative.

  • The impact of U.S. monetary policy on foreign economies can be mitigated by the actions of central banks in those countries and their own economic fundamentals.

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