markets for monetary policy by beginning with the first stages of the monetary policy transmission mechanism. in particular, as you know, the federal reserve influences financial conditions through its ability to control the federal funds rate, the interest rate at which banks lend to each other overnight. through the use of open - market operations and other techniques, the federal reserve can manage the supply of funds in the interbank market as needed to keep the federal funds rate close to its target, a capability that has not been affected by the increased international integration of financial markets. although the federal funds rate does not itself have a major influence on economic activity, other short - term rates – such as eurodollar rates – are determined largely by the current and expected future values of the funds rate, reflecting the close substitutability of alternative short - term sources of funding. the federal reserve ’ s ability to control the federal funds rate thus gives it a strong influence over other short - term dollar nominal interest rates and, to the extent that inflation is inertial or sticky in the short run, over short - term real interest rates as well. the fed ’ s ability to set the short - term interest rate independently of foreign financial conditions depends critically, of course, on the fact that the dollar is a freely floating currency whose value is continuously determined in open, competitive markets. if the dollar ’ s value were fixed in terms of another currency or basket of currencies, the fed would be constrained to set its policy rate at a level consistent with rates in global capital markets. because the dollar is free to adjust, u. s. interest rates can differ from rates abroad, and, consequently, the fed retains the autonomy to set its federal funds rate target as needed to respond to domestic economic conditions. short - term interest rates affect the domestic economy through a number of channels ( for example, by affecting the cost of holding inventories ), so monetary policy could influence economic activity to some degree even if its control were limited to the short end of the yield curve. moreover, the pricing of some putatively long - term financial assets may be strongly influenced by shorter - term rates. thirty - year fixed - rate mortgages provide one example. because people move or refinance their loans, leading them to prepay their mortgages, and because the pattern of real mortgage payments is more frontloaded than that of nominal payments, the effective duration of a thirty - year mortgage may be closer to five years than to thirty years

it implies that the phillips curve is steeper today than in the past ( that is, that inflation is more sensitive to slack in the economy ), a prediction that does not accord with most empirical studies. the dollar prices of imports are also affected by changes in the value of the exchange rate. however, the effects of exchange - rate changes on the domestic prices of imported goods have been quite low in recent years. cost emerging - market economies have also helped keep down the prices of imports received by the united states and other industrialized countries. indeed, the share of u. s. non - oil imports coming from the emerging asian economies has increased from 27 percent to 34 percent over the past decade or so. overall, research indicates that trade with developing economies in particular has slowed the rate of growth of import prices faced by industrialized countries, with estimates of the reduction ranging widely from 1 / 2 to 2 percentage points. one study, for example, estimated that trade with china alone has reduced annual import price inflation in the united states by about 1 percentage point over the period 1993 - 2002 ( kamin, marazzi, and schindler, 2006 ) 7. however, imported goods make up only part of what people consume, and so the effect on overall inflation is less than the deceleration in the prices of imports alone. typical estimates of the short - term effect on the overall inflation rate of less - rapid increases in the prices of imports stemming from trade with china are in the neighborhood of 0. 1 percent or less per year – a discernable but certainly not a large effect. this result requires several qualifications. first, the direct effect of lower import prices on overall consumer price inflation could understate the overall effect, if lower import prices force competing domestic firms to restrain their prices as well. research has generally found that import prices do affect the prices charged by domestic producers. 8 for example, the international monetary fund found that, in a range of industrial economies, the prices of domestic products were restrained by competition from imports, the effect being larger with greater penetration ( imf, 2006 ). to the extent that import competition slows the rate of increase of domestic prices, the tendency of lower - cost imports to reduce domestic inflation will be enhanced. on the other hand, not all aspects of globalization and trade reduce inflation. for example, globalization has been associated with strong growth in some large emerging - market economies, notably china and india, and this growth likely has contributed to recent