The United States is the world’s most influential economic player. The United States Federal Reserve’s actions, in particular, affect the rest of the world via three channels: trade and exchange rates (a healthy US economy will absorb exports from the rest of the world; a lower dollar will increase US exports to the rest of the world), capital flows (lower short and long term interest rates will push capital flows to the rest of the world and vice versa), and global risk-taking and stability (a stable US economy reduces risk-premia around the world and encourages investment).
So what has been the international impact of the Fed these last few crises-ridden years? The US Congress’ House Committee on Financial Services Sub-Committee on Monetary Policy and Trade held a hearing yesterday to discuss this question. In my testimony, I argued that the Fed’s role has been quite positive. It has discharged its domestic responsibilities to the US economy while also being mindful about the international consequences of its actions.
In fact, my main message was that the rest of the US government needed to be as good and constructive an international player as the Fed has been. I singled out three issues on which the US Congress needed to exhibit international leadership: to strengthen the IMF by passing legislation that would augment the IMF’s resources, an issue on which the US is an embarrassing and sole laggard; to ensure that the US does not constrain in its bilateral investment treaties and free trade negotiations the ability of partner countries to use capital account controls to deal with the downsides of financial globalization; and to exercise caution in dealing with the issue of currency manipulation in the ongoing Trans-Pacific Partnership negotiations.