How does U.S. monetary policy affect other countries?
Just as developments abroad affect the U.S. economy, changes in U.S. economic conditions impact on foreign economies, although the effects are not necessarily symmetric. Because of the large relative size of the U.S. economy, changes in U.S. economic conditions have relatively larger effects on foreign economies, compared to the effect of changing conditions in any one country abroad on the U.S. economy. A change in U.S. monetary policy affects foreign economies in three ways — via exchange rates, interest rates, and income in the United States. The effects depend critically on the nature of the foreign exchange regime in the foreign country. If the foreign country’s currency is pegged to the dollar, for example, there will, of course, be no exchange rate effect vis–vis the United States. An increase in U.S. interest rates, however, would put downward pressure on the foreign currency and require the country to raise domestic interest rates to maintain the fixed exchange rate. Therefo
