Specifically, we call for the creation of an International Monetary Policy Committee composed of representatives of major central banks that will report regularly to world leaders on the aggregate consequences of individual central bank policies.”  6  Ferrero, Gertler, and Svensson (2009) provide a suitable model for such thought experiments, a New Keynesian DSGE model of a world with two large countries and tradable and nontradable goods. BIS central bankers’ speeches  7  foreign economy. Everything else equal, this has two consequences for the domestic economy. First, due to increased foreign activity, foreign demand for domestic exports increases somewhat. Second, the interest-rate differential between the domestic and foreign interest rates increases. This will trigger an incipient capital inflow into the domestic economy and appreciation of the domestic currency. Suppose the appreciation is so large as to trigger depreciation expectations that balance the increased interest-rate differential. This will again stabilise the capital flow at zero. Everything else equal, the appreciation of the currency is a real appreciation, which is contractionary for the tradable-goods sector. Assume that this contractionary effect dominates over the initial increase in export demand, so the net effect on the tradable-goods sector is contractionary. Demand for, and the output of, nontradable goods may expand somewhat from the appreciation, but assume that the contraction of the tradable-goods sector dominates so the net effect on domestic output is a contraction. The appreciation also leads to lower inflation, through lower prices on imported goods.

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.