to control short - term interest rates, which affect the domestic cost of credit and long - term interest rates, and so can continue to do their job of stabilizing inflation and output. are there other ways, besides possible influences on inflation and interest rates, in which globalization may have affected the transmission mechanism of monetary policy? the preceding discussion might lead to the conclusion that globalization has not had important effects, either on the behavior of inflation or the ability of monetary policy to affect the economy. however, globalization might have an effect on the process of monetary transmission that does not operate through phillips - curve - type mechanisms. one of the key transmission channels of monetary policy is the exchange rate. a tightening of monetary policy, for example, raises u. s. interest rates relative to those abroad, thereby inducing upward pressure on the foreign exchange value of the dollar. an appreciation of the dollar, in turn, restrains exports ( because the price of u. s. goods rises when measured in foreign currencies ) and stimulates imports ( because imports become cheaper in dollar international monetary fund ( 2006 ) finds indirect evidence supporting this channel – namely, that inflation is affected by relative import prices multiplied by import shares in gdp and that import shares have been rising over time. ihrig and others ( 2007 ) document a rise in the sensitivity of u. s. inflation to import prices over time, although they do not identify such a trend in other countries. terms ). the resulting decrease in net exports implies a reduction in aggregate demand. in addition, an appreciation of the dollar that leads to a decline in import prices also helps restrain overall u. s. inflation. by expanding the share of tradable goods and services in the economy, globalization might increase the role of the exchange rate as a transmission channel of monetary policy and could reduce the role of the interest rate channel. the larger the share of imports and exports in the economy, the greater the change in net exports – and, hence, in the contribution of net exports to gross domestic product ( gdp ) growth – for a given change in the exchange rate. in addition, the larger the share of imports in the economy, the larger should be the effect on overall cpi inflation of a given change in import prices when the exchange rate changes. 4 ( this effect is explicitly incorporated in federal reserve staff models of u. s. inflation, which weight import prices by the share of imports in the consumption basket. ) by the same token, the effect of

among state supervisors, with each state supervisor responsible for monitoring compliance with local law by local offices. examination for compliance with federal consumer laws in some instances is left to the federal banking agencies and in others is shared with state bank supervisors. in addition to building on the strength of our system of state bank supervisors, we realized that supervising large interstate operations requires different and significantly more sophisticated techniques than we employ for our smaller local banks. for example, our bank examination practices for many years focused on the review of a sizable number of individual loan files at each bank. this is an amazingly intrusive and time - consuming process. and it became increasingly obvious that as institutions grew in size, the technique was not practical on a large scale. over time, we have had to develop more - sophisticated sampling techniques as well as methods for identifying and focusing our examinations on areas of greatest risk to the banking organization. we continue to review the policies and efforts that each bank employs to identify the risks it faces, to set and implement standards to address those risks, and to monitor the effectiveness of its riskmanagement practices. this approach involves the examination of policies and procedures and the review of statistics on loan default experiences for entire portfolios rather than large numbers of individual transactions. we are in the process of developing a more - sophisticated approach to capital as well. the current “ basel ” capital standard was developed in 1988 through negotiations conducted by bank supervisory authorities under the auspices of the bank for international settlement in basel, switzerland. current efforts to replace this capital accord with a new version ( called basel ii ) take a decidedly more riskfocused approach to measuring risk. the proposed approach would build on techniques used by the largest banks worldwide and should produce results that are much more consistent than the existing standard with market perceptions of risk. it would separate risks into their component parts and should give supervisors important new tools for evaluating not only the level of risk, but also the performance and responsiveness of bank management. although the proposed standard will be a challenge to implement and enforce, it will also provide important and necessary incentives to managers of our largest institutions to adopt more - sophisticated practices for measuring and managing risk. we have also developed more risk - focused techniques for reviewing compliance with applicable consumer and other laws. at the same time, we - like the state insurance commissioners - have established consumer complaint divisions in each of the federal banking agencies to monitor and investigate individual consumer complaints. to be sure, our system of risk - focused supervision of banking organizations relies