Monetary Policy Implications of Recent Changes in the Financial Systems in the United States and Europe

Abstract

Financial markets have evolved significantly in recent years in the United States and Europe. Although economic growth has slowed almost everywhere among high-income countries, growth would have slowed even more without improvements in economic efficiency arising from the growth of world trade and accompanying developments in international finance. The differential attitude toward freedom of trade and international capital flows — the attitude that free trade was to be encouraged but international capital flows were to be controlled — has broken down to a considerable extent. In part this change reflects the profitability of trade in financial services, which cannot occur without the capital flows to be serviced. The change in attitude also reflects recognition of the intimate relationship between trade in goods and services and the financing mechanisms including long-term capital flows, short-term trade finance, and foreign exchange dealing that accompany trade.KeywordsExchange RateInterest RateMonetary PolicyCentral BankReal Exchange RateThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.