richard h clarida : global shocks and the us economy speech by mr richard h clarida, vice chairman of the board of governors of the federal reserve system, at " the euro area : staying the course through uncertainties " bdf symposium and 34th suerf colloquium, sponsored by the bank of france and the european money and finance forum, paris, 28 march 2019. * * * good afternoon. it is a pleasure to be here at the banque de france and take part in this important symposium on the “ euro area : staying the course through uncertainties. " 1 both in the financial press and in international policy circles, one hears a great deal about the spillovers of u. s. monetary policy to other economies. one hears somewhat less, though, about how global shocks affect the u. s. economy. 2 so, in my remarks today, i will discuss how the u. s. economy ’ s increasing integration with the rest of the world has made it more exposed to foreign shocks, and i will focus in particular on the channels of transmission through which these shocks operate. i will close with a few words on current prospects, in which global crosscurrents are again posing challenges for the u. s. economy and monetary policy. greater integration between the united states and the rest of the world the u. s. economy ’ s integration with the rest of the world, both in terms of trade and finance, has risen substantially over the past 60 years. since the 1960s, both u. s. exports and imports have about tripled as a share of gross domestic product ( gdp ), with their sum now about 30 percent of gdp — still relatively small by international standards, but certainly notable. financial linkages have grown enormously as well. the united states has had open capital markets for a long time, but the sum of u. s. external assets and liabilities has grown from about 25 percent of gdp in 1960 to more than 300 percent today. and, reflecting the greater integration of global financial markets, the correlation of u. s. and foreign equity and bond markets has trended broadly upward for several decades. 3 channels of transmission of global shocks to the u. s. economy this increased integration i have described has heightened the exposure of the u. s. economy to external shocks. but what are the channels of transmission of these shocks to the united states? for concreteness, let us consider the case of a negative demand shock

. to be sure, the russian default of august 1998, followed by the collapse of long - term capital management, had more - substantial effects on global markets and posed greater risk to the u. s. economy, which triggered a policy response by the fed in which the federal funds rate was cut 75 basis points between september and november of that year. 8 of note, after economic prospects appeared to stabilize, the fed reversed those cuts in 1999. in recent times, global shocks have also been consequential for u. s. economic prospects and monetary policy. examples include the 2011 – 13 euro - zone recession and the china devaluation and capital flight episode of 2015 and ‘ 16, when worries about a hard landing and renminbi depreciation, respectively, roiled world markets. both of these shocks originated in economies with large footprints in the global economy and financial system, and, as a result, they induced substantial disruptions in global financial markets. during both episodes, u. s. stock markets fell and the dollar appreciated, especially during 2015 and 2016. as ever, these negative shocks were associated with safe - haven flows that pushed u. s. treasury yields down. 9 despite the drop in yields, overall financial conditions in the united states tightened, weighing on aggregate demand. 10 yet, in these episodes, accommodative policy responses in the united states helped ward off actual contractions of u. s. activity. during the 2011 – 13 euro - zone recession, the united states was already pursuing very accommodative policies in the wake of the global financial crisis, but the timing of the maturity extension program and the third phase of u. s. quantitative easing suggests they were helpful responses to the spillovers to the united states from this downturn. 11 for the china episode of 2015 and ‘ 16, federal open market committee ( fomc ) statements from the time indicate that concerns about foreign developments and their effect on u. s. financial conditions were a factor contributing to the delay in previously anticipated policy rate increases, thereby supporting the economy. the message from these recent episodes is not just about the importance of timely policy adjustments by the central bank. it is also about the importance of the enhanced resilience of financial institutions that has been achieved since the global financial crisis. undoubtedly, this resilience helped prevent adverse financial shocks from contributing to a more serious downturn. recent developments let me conclude with some remarks on recent developments. u. s