Abstract

This paper analyzes the linkages between the effects of globalization on U.S monetary policy. It states that the effects of globalization on monetary policy may be perceived through its impact on the financial and economic environment in which it is implemented. Thus, international phenomena have significant influences on the domestic economy and on the ability to achieve domestic goals. This topic is empirically of particular interest at least for three main reasons: First, the current economic and financial crisis affects the World’s economy. Second, world financial markets are currently experiencing substantial turbulence starting with the “subprime” mortgage crisis in the United States and its prominent propagating role through international financial linkages in all the continents. We will review some problems that international considerations are creating for the U.S. economy over the coming decades, such as the more globally connected a country is, the less flexibility it has with its monetary policy. Third, an alternative to using monetary policy to guide the economy toward meeting its international goals is trade policy designed to affect the level of exports and imports and the inflation rate. Finally, we conclude our study by exploring how to restore international trade balance to the U.S. Economy. So as long as other countries are willing to accept U.S. assets in payment for the goods they produce, the United States will continue to run a trade deficit at the current exchange rate.

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