Ferrero, Andrea, Mark Gertler, and Lars E.O. Svensson. 2009. “Current Account Dynamics and Monetary Policy.” In Gali, Jordi, and Mark Gertler (eds. ), International Dimensions of Monetary Policy, Chicago University Press. IMF. 2009. World Economic Outlook. International Monetary Fund. www.imf.org. IMF. 2011a. World Economic Outlook. International Monetary Fund. www.imf.org. IMF. 2011b. “Recent Experiences in Managing Capital Inflows – Cross-Cutting Themes and Possible Policy Framework.” Report from International Monetary Fund. www.imf.org. Kohn, Donald L. 2007. “John Taylor Rules.” In From the Great Moderation to the Great Deviation: A Round-Trip Journey Based on the Work of John B. Taylor. Hoover Institution Press. Kohn, Donald L. 2008. “Monetary Policy and Asset Prices Revisited.” Speech on November 19. www.federalreserve.gov. Kohn, Donald L. 2009. “Policy Challenges for the Federal Reserve.” Speech on November 16. www.federalreserve.gov. Svensson, Lars E. O. 2003. “The Inflation Forecast and the Loss Function.” In Central Banking, Monetary Theory and Practice: Essays in Honour of Charles Goodhart, Edward Elgar. Svensson, Lars E. O. 2010. “Inflation Targeting and Financial Stability.” policy lecture at the CEPR/ESI 14th Annual Conference on “How Has Our View of Central Banking Changed with the Recent Financial Crisis?”, hosted by the Central Bank of Turkey, Izmir, October 28, 2010. Svensson, Lars E. O. 2011a. “Practical Monetary Policy: Examples from Sweden and the United States.” Brookings Papers on Economic Activity. Forthcoming in Fall 2011 edition. Svensson, Lars E. O. 2011b. “Inflation Targeting.” In Friedman, Benjamin M., and Michael Woodford, eds., Handbook of Monetary Economics, Volume 3b, chapter 22. North-Holland. White, William R. 2006.

IMF (2011a) examined international capital flows over the last 30 years and found that net capital flows to emerging markets have been strongly correlated with changes in global financing conditions, rising sharply during periods with relatively low global interest rates. Based on these and similar observations some observers have conclude that the effects on capital flows to other countries should be taken into account in, for instance, Federal Reserve policy decisions. For example, Eichengreen, Rajan, and Prasad (2011) find that the political authorities in large economies “should let considerations of these external effects play an explicit role in the monetary policy framework. Central banks in these countries should pay more attention to their collective policy stance and its global implications.”5 I do not agree with that conclusion. The Federal Reserve’s mandate concerns U.S. inflation and employment, and the Federal Reserve is not responsible for inflation, real developments, and monetary policy in other countries except as they feed back into the United States. That responsibility should rest with the policy authorities in those countries. Countries that choose to stabilise their dollar exchange rate or even peg to the dollar will tend to import U.S. expansionary monetary policy into to their own country. This monetary policy may in many cases be too expansionary for the countries concerned, creating an overheated economy with risks for bubbles and other negative consequences. A flexible exchange rate would give the countries the option of conducting an independent monetary policy appropriate for the country in question.