This article examines the impact of global developments on the practice of U.S. monetary policy, broadly defined to include regulatory and lender-of-last-resort functions as well as open market, discount, and intervention activity, over the past forty years. It is part of a paper presented at the forty-fifth economic conference of the Federal Reserve Bank of Boston. The authors briefly review a few familiar facts establishing the increased openness of the U.S. economy, and go on to explore episodes when external events beyond those included in the domestic outlook—events like significant exchange rate shifts—appear to have influenced monetary policy decisions. They find that the view that U.S. monetary policy is mostly or even entirely domestically oriented is largely incorrect, in at least three different respects. Greater engagement with the rest of the world in both trade and financial transactions has led the U.S. economy to be more directly affected by overseas developments than it was three or four decades ago. Moreover, a perusal of FOMC records reveals extensive references to international developments in discussions of the future direction of monetary policy. And third, external competitive pressures have facilitated substantial changes in the structure of the U.S. financial system. This interplay between financial innovation and regulatory change has in turn affected how monetary policy works.Economic
