Monetary policy is a core tool that governments use to influence the economy. It affects the supply of money, inflation, interest rates, and sometimes exchange rates. Traditionally monetary policy has been modeled, at least in the United States, as if there was a closed economy; that is, excluding international factors such as capital flows. This model was defensible as long as the U.S. economy was autonomous from exogenous shocks. But this is increasingly unrealistic, and thus there is more analysis on the implications of globalization, or the reduction in trading costs, technological developments, and greater integration of goods and capital markets around the globe that has tightened links among national economies. In this edited collection, which brings together a wide-range of fresh research, leading experts examine the real and potential effects of increased openness and exposure to international economic dynamics, looking at the United States, Europe, and smaller countries that are more exposed to international trade. The continued importance of central banks is highlighted, as is the importance of nuanced policy. Good monetary management can significantly mitigate any pain from current account adjustment, and here domestic inflation targeting has advantages compared to attempts to peg the exchange rate, which can do considerable damage to the economy. At a time of financial and economic uncertainty, the importance of monetary policy has only increased, making this an important contribution to understanding its functioning and limits.
