FREE ESSAY ON MONETARY POLICY

MONETARY POLICY

International Dimensions to U.S. Monetary Policy
Executive Summary
Federal Reserve monetary policy has traditionally focused on the domestic economy. Over
time, however, a number of significant trends have underscored the potential importance
of the international dimensions of contemporary monetary policy. Such trends include the
following: 
? Financial markets continue to become increasingly integrated internationally; capital
is evermore mobile. 
? The U.S. dollar continues to remain the world's principal international currency
despite evolving exchange rate arrangements. 
? Official and unofficial dollarization has continued in several emerging market
economies. 
These trends suggest that monetary policy may have differing transmission mechanisms
increasingly involving international variables than was earlier the case. In addition to
these trends, empirical evidence recently has accumulated showing that changes in U.S.
monetary policy can significantly impact emerging market economies in a number of ways.
For example, changes in U.S. monetary policy can (1) dominate capital flows in emerging
market economies, (2) be associated with financial crises in these countries, and (3)
significantly impact interest rates and financial markets in emerging economies under
differing exchange rate arrangements. Furthermore, experience shows that the Federal
Reserve can successfully assume international lender-of-last-resort responsibilities and
stabilize world financial markets in situations of international liquidity crises. 
The Federal Reserve should increasingly recognize these international considerations when
conducting monetary policy. 
International Dimensions to U.S. Monetary Policy
I. Introduction
Traditionally, Federal Reserve monetary policy has focused on the domestic economy.
Although international factors have not been ignored, they have been subordinate to
domestic concerns. International concerns are rarely important rationale influencing
Federal Reserve monetary policy decisions; further, the global impacts of U.S. monetary
policy decisions seldom receive much attention from monetary officials. 
Recent trends and developments, however, suggest this domestic orientation may not be
entirely satisfactory for U.S. monetary policy. There is a growing recognition of the
fact that financial capital is increasingly mobile, and financial markets are evermore
globally integrated. At the same time, varying degrees of dollarization have occurred in
several emerging market economies and the dollar remains the world's principal
international currency despite evolving developments in exchange rate arrangements. These
considerations have a number of important implications for U.S. monetary policy. For
example, they help to explain why changes in U.S. monetary policy can have increasingly
potent effects on emerging market economies that should be recognized and why the Federal
Reserve's implicit international lender-of-last-resort (LOLR) responsibilities are so
important.1 These international considerations can be taken into account by anchoring
prices with a price stabilization policy goal and using key market price indicators as
policy guides. 
After briefly describing these evolving circumstances -- namely, increased capital
mobility, dollarization, and the international role of the dollar -- this paper briefly
reviews the evidence suggesting that changes in Federal Reserve monetary policy have
implications for both emerging markets and the global economy. Implications for the
Federal Reserve's international LOLR role are highlighted and some recommendations for
monetary policy are outlined. 
Recent Trends and Developments 
? Increasing Financial Integration and Growing Capital Mobility. 
Clearly, one important trend of recent years is increasing international financial
integration and growing capital mobility.2 Most economists now recognize the inexorable
trend toward globalization or growing international integration of financial markets and
increasing capital mobility. Empirical results, for example, increasingly provide
evidence of growing capital mobility. In particular, data on capital flows as well as
interest rate differentials indicate that a growing degree of capital market integration
or increased capital mobility has occurred since the 1970s.3 The U.S. economy, along with
most other economies, is more open. Many experts believe these trends are largely
inevitable and irreversible, partly because they are being driven by communications and
informational technological change and partly because policymakers increasingly recognize
the many compelling benefits of regulatory changes that foster financial integration.4
Accordingly, a growing consensus among economists is that there is no turning back: i.e.,
that capital mobility is here to stay.5 
There are a number of important implications of this increased international financial
integration. This more open environment, for example, implies that changes in monetary
policy involve a somewhat different transmission mechanism. In particular, the more
integrated the economy, the more quickly and substantially do divergent policies affect
financial markets and capital flows. And the foreign exchange rate may play an
increasingly important role in transmitting changes in monetary policy to the
macroeconomy. Accordingly, exchange rate movements potentially may contain more useful
information about changes in monetary policy than in previous, more closed (less
integrated) circumstances. 
? Clarification of the policy trilemma
These altered conditions of increased capital mobility also place important constraints
on monetary policy, commonly referred to as the policy trilemma. As Obstfeld ably
describes it: 
The limitations that open capital markets place on exchange rates and monetary policy are
summed up by the ideas of the 'inconsistent trinity' or ...'the open- economy trilemma'
...that is, a country cannot simultaneously maintain fixed exchange rates and open
capital markets while pursuing a monetary policy oriented toward domestic goals.
Governments may choose only two of the above.6 
If capital mobility is, indeed, an irreversible given, the policy choices circumscribed
by the above trilemma are increasingly limited. In particular, policy choices are now
between flexible exchange rate/domestic policy goal (e.g., inflation targeting) regimes
and fixed exchange rate/without domestic goal regimes.7 If policymakers fix the exchange
rate, they lose control of the interest rate; if they peg the interest rate they can't
control the exchange rate. In starker terms, capital mobility confronts national
authorities with a decision over controlling either interest rates or exchange rates.8
Some authors [e.g., Obstfeld (1998), Eichengreen (1996)] suggest that in recent years,
the choice has moved mostly in favor of the flexible exchange rates/domestic policy
alternative: i.e., mostly in favor of controlling interest rates rather than exchange
rates.9 The U.S. has evolved into such a regime: namely, a de facto informal inflation
targeting position.10 For most countries, this result may be due in part to
considerations of political economy; contemporary political forces may mandate that
domestic policy goals be given attention.11 Nonetheless, the trend does underscore the
constraints brought to bear on policy choices by increased capital mobility. 
? The Continued International Currency Role of the Dollar
Another important trend relates to the continued international currency role of the U.S.
dollar. Despite the collapse of the dollar-based Bretton Woods (fixed exchange rate)
system and the move to more flexible exchange rate arrangements, the dollar continues to
be used as the principal international currency. As Robert Mundell has aptly stated: 
Flexible exchange rates did not dispense with the need for international reserves or end
the dominant role of the dollar. In one sense the dollar became more important than ever.
The need for an international unit of account for purposes of international trade and
finance was just as great as ever, and the increased uncertainty associated with flexible
exchange rates increased, rather than eliminated the need for international reserve
assets... The dollar remained the principal international monetary reserve (in the 1980s
and 1990s). The enhanced role of the dollar under flexible exchange rates was reflected
in the rapid expansions of dollar reserves which has more than kept pace with the growth
of trade...12 
More specifically, the dollar continues to provide the principal functions of an
international money and thereby remains the dominant international key, vehicle, and
reserve currency. This fact has been documented by several recent studies [such as
McKinnon (2000) and Hartmann (1998)].13 
The continued use of international currency suggests there remains an important demand
for the services of international currency: i.e., continued demand for a money for other
monies. Given this existing global demand, important responsibilities accrue to the
supplier of this principal global currency, the Federal Reserve. In particular, if the
supplier of international reserve currency pays attention to changes in its demand and,
accordingly, adjusts supply to match changes in the demand for international currency,
global stability may be promoted. This suggests that the Federal Reserve should focus
attention on price signals and should provide a stabilizing price anchor for the current
fiat money system. It also suggests that the Federal Reserve -- as the supplier of the
dominant international reserve asset -- should recognize that when it tightens policy
(thereby restricting the supply of international reserves), other central banks may well
tighten, and when it eases, others may ease. In short, its policy moves can be magnified
or made more potent because of these reactions. Additionally, the use of global reserves
suggests the need for the services of an international lender of last resort (LOLR) for
liquidity crisis situations involving sharp increases in the demand for international
reserves.14 Since the Federal Reserve is the ultimate supplier of this liquidity, these
international LOLR responsibilities fall upon the Federal Reserve. 
? The Dollarization of Emerging Market Economies
Another notable and related development relates to the dollarization -- the official and
unofficial use of the dollar to displace domestic currency -- in several emerging market
economies. A number of studies examining the extent of such dollarization suggest that it
is substantial in a number of countries, especially those in Latin America as well as in
Russia.15 Related evidence indicates that foreigners hold significant percentages (above
50 percent) of dollar notes in circulation.16 
This widespread dollarization suggests that changes in U.S. monetary policy may have
important impacts on the many users of dollars. Accordingly, there may be potential
implications for Federal Reserve monetary policy. Since these effects of changes in
Federal Reserve policy can be nontrivial, it may be desirable to consider them in
policymaking deliberations. 
Implications 
The trends and developments outlined here can have some important implications. All of
these factors -- the increased international integration of financial markets together
with dollarization and the continued international currency role of the dollar -- suggest
that changes in Federal Reserve monetary policy may have differing effects than revealed
in earlier experience. With this more open economy and key role of the dollar, the
transmission mechanism of U.S. monetary policy may have changed. In particular, various
financial markets (e.g., foreign exchange, bonds, equities) may currently play a more
significant role in transmitting changes in monetary policy. Changes in U.S. monetary
policy may have more potent impacts on foreign countries than earlier was the case. And
the global economy itself may experience different impacts of changes in Federal Reserve
policy. 
Some Emerging Empirical Evidence 
A growing body of empirical evidence suggests that changes in Federal Reserve monetary
policy can have significant impacts on foreign countries, on international financial
variables, and, indeed, on the global economy. This evidence, however, is dispersed among
varieties of research concerned with related, but differing topics; for example,
empirical evidence on the Federal Reserve's international effects has emerged from
studies examining the determinants of capital flows in emerging markets, the causes of
recent banking and currency crises, and the choice of exchange rate regimes. The evidence
is not centralized in readily accessible literature, in part because there are multiple
channels through which changes in U.S. monetary policy can have its foreign impact. The
form of this impact, moreover, depends in part on the existing exchange rate regime. 
This diverse literature relating to the international dimension of changes in Federal
Reserve policy is organized into three categories and briefly surveyed as follows: 
? Studies examining the determinants of capital flows.
Recently, a number of studies have analyzed the determinants of sensitive capital flows
to emerging market economies. Initially, researchers focused on the performance and
differing characteristics of individual countries in explaining these capital flows;
however, they soon noticed that capital flows tended to affect many emerging economies at
the same time, despite their differing characteristics. In short, common (international)
factors appeared to be important determinants of these movements. 
More specifically, investigators found that factors external to these emerging market
economies -- such as international interest rate movements in large industrialized
economies and financial centers such as the U.S. -- played a significant role in
explaining these capital flows. In particular, changes in U.S. monetary policy tended to
be associated with changes in financial (money, bond, and equity) markets in several
emerging market economies. This was aptly stated by Calvo, et al. (1996): 
The tightening of monetary policy in the U.S. and the resulting rise in interest rates in
early 1994 made investment in Asia and Latin America relatively less attractive... higher
interest rates quickly and markedly affected developing country debt prices. Indeed, the
rise in U.S. rates also triggered market corrections in several emerging stock markets.
It seems likely that with highly integrated and technologically sophisticated financial
markets, changes in relative rates of return will quickly translate into cross-border
capital flows.17 
Similarly, Goldstein and Turner (1996) argued that: 
...empirical evidence suggests that movements in international interest rates can explain
between one-half and two-thirds of the swings in private capital inflows to developing
countries in the 1990s. 
Studies reaching conclusions consistent with these arguments include: Calvo et al.
(1993), Dooley et al. (1994), Chuhan et al. (1993), Goldstein (1995), Fernandez-Arias
(1994), Eichengreen (1991), and Eichengreen and Fishlow (1996).19 
In short, this literature establishes that changes in external (or global) factors such
as movements in the interest rates of leading industrial countries like the U.S.
significantly influence emerging market financial markets and can be dominant
determinants of capital flows to these emerging economies (especially in Latin America).

? Studies Examining the Causes of Recent International Financial or Banking Crises
A number of studies have examined the factors causing recent international financial or
banking crises. While these studies identify multiple factors contributing to these
crises, the literature does find that many banking crises in developing economies are
associated with prior increases in the interest rates of key developed economies such as
the U.S. 
Eichengreen and Rose (1998), for example, note that: 
Our central finding is a large, highly significant correlation between changes in
industrial-country (including U.S.) interest rates and banking crises in emerging
markets... Northern interest rates rise sharply and significantly (relative to their
level in non-crisis control group cases) in the year preceding the onset of banking
crises, before peaking in the crisis year and the year following. 
This result... points strongly to the role played by external financial conditions -- and
in particular to the effect of rising interest rates in worsening the access of
developing-country banking systems to offshore funds... 
Our finding of an important role for world interest rates in the onset of banking crises
reinforces the conclusions of (others)... for increases in world interest rates to
precipitate banking problems.20 
Others have come to similar conclusions. Frankel and Rose (1996) find that increases in
developed country (including U.S.) interest rates significantly enhance the likelihood of
a currency crash in developing countries; increases in foreign (e.g., U.S.) interest
rates play a meaningful role in predicting currency problems.21 Kaminsky and Reinhart
(1996) suggest that external factors such as increases in interest rates in the U.S. may
play an important role in explaining the prevalence of banking and balance of payment
crises.22 Results consistent with this argument were attained by Chang and Velasco
(1998). These authors contend that the 1997-98 crises in Asia were in fact a consequence
of international illiquidity which could in turn be partly rectified by the liquidity
provision of an international lender-of-last resort.23 
In addition to evidence on the effects of changes in U.S. interest rates on recent
international financial crises, evidence also exists as to the causal effects of changes
in the foreign exchange value of the dollar on such crises.24 While several authors
mention the role of dollar movements as contributing factors in the recent Asian
financial crisis, Whitt (1999) provides convincing evidence that dollar appreciation
prior to the recent Asian financial turbulence was a significant contributing factor to
this crisis.25 Specifically, several key emerging economies in Asia tied their currencies
to the dollar, yet maintained significant trading relationships with Japan. Consequently,
a significant appreciation of the dollar relative to the yen impelled these countries to
follow the dollar (and U.S. monetary policy), thereby causing their currencies to
appreciate against the yen. Consequently, their trade positions with Japan were severely
effected just before the currency attacks began, thereby significantly contributing to
the financial crises in Asia.26 
? Other Evidence 
Evidence on the impact of changes in U.S. monetary policy on foreign (international)
interest rates recently has emerged from research related to the choice of exchange rate
regime literature. In considering alternative exchange rate regimes available to emerging
market countries, for example, Frankel and others have examined the interest rate
responses in emerging countries to changes in U.S. (Federal Reserve) interest rates.27
Frankel finds that when the Federal Reserve raises interest rates, these increases are
quickly and entirely passed through to those emerging market economies with exchange
rates rigidly tied to the dollar. Such exchange rate regimes require the emerging economy
to follow the same monetary policy as the U.S. regardless of its appropriateness to local
economic conditions. The situation is even more dramatic, Frankel finds, for emerging
market economies that maintained a loose link to the dollar (such as Brazil or Mexico).
In these cases, a Federal Reserve interest rate hike induces local interest rates to
increase by more than those in the U.S.; these emerging market rates turn out to be more
sensitive to U.S. policy moves and rise by more than one-for-one.28 (Similar results are
found by Hausmann et al., and Frankel and Okongwu.) Frankel argues that the reason for
this surprising result is that the U.S. interest rate increase has a large negative
effect on capital flows and international investors are nervous about the loose exchange
rate link, requiring an extra risk premium for devaluation and default risk as well as
for the lack of credibility on the part of macroeconomic policymakers. 
In short, this evidence indicates that changes in U.S. monetary policy can have potent
impacts on the interest rates in emerging market economies under different exchange rate
regimes. The evidence suggests that as international financial markets become more
integrated, interest rates in emerging economies may become increasingly sensitive to
changes in the interest rates of large developed countries. 
The empirical evidence briefly outlined here indicates that changes in U.S. monetary
policy importantly affect financial markets in emerging markets in a number of ways.
These changes may dominate capital flows in emerging market economies and U.S. rate hikes
have been associated with banking or financial crises in these developing economies.
Further, movements in U.S. interest rates may have potent effects on interest rates in
emerging markets under differing exchange rate regimes. 
? Anecdotal Evidence: The Interest Rate Cuts in the Fall of 1998 
In addition to this growing collection of formal empirical evidence, anecdotal evidence
is also relevant. In particular, assessments of the three Federal Reserve interest rate
cuts in the fall of 1998 led several analysts and Fed watchers to conclude that
international factors may have weighed heavily in precipitating this Federal Reserve
action. 
These interest rate cuts, it will be remembered, took place in the context of
international financial market turbulence associated with the Russian devaluation and
debt moratorium in mid-August 1998. It was during this period that the Federal Reserve
cut interest rates and took to monitoring risk and liquidity spreads after world
financial markets threatened to seize up following the Russian problems. 
The official rationale for these rate cuts was always framed in terms of their effects on
the U.S. economy. Nevertheless, FOMC minutes indicated the moves were undertaken in light
of the effects of the prevailing global (international) turmoil including its impact on
the liquidity of financial markets. 
In assessing the episode, various economists, Fed watchers, and market observers
generally concurred with the need for Federal Reserve action. Their interpretations of
this action, however, often more explicitly recognized the international dimension of the
Federal Reserve policy moves and of the Federal Reserve's implicit assumption of
important international lender-of-last-resort responsibilities (associated with the
dollar's reserve currency status). 
One well-known market observer, Allen Sinai, for example, argued that: 
The Greenspan Federal Reserve appears to have shifted regime, operating with a new policy
framework that takes the world economy and financial system into account, viewing the
U.S. as one component in this system.30
Another market observer remarked: 
The Fed Chairman understood that he had to act quickly to convince markets the U.S.
central bank was ready to assist the world economy in crisis.31
Similarly, in remarks to the American Economic Association in January 1999, the IMF's
Stanley Fischer stated that: 
...in recent months the leading central banks, in recognition of the feedbacks between
the emerging market and the industrialized economies, have taken actions in the interests
of their own countries that stabilize the world economy.32 
In short, in taking this action, the Federal Reserve indicated it is capable of taking
international, global factors into account and, indeed, providing important international
lender-of-last-resort services, thereby serving to calm skittish world financial markets
in situations of sharp increases in demand for international liquidity.33 This is another
manifestation of the international dimensions of Federal Reserve policy, which is
sometimes not explicitly recognized. 
Summary 
Federal Reserve monetary policy has traditionally focused on the domestic economy. Over
time, however, a number of significant trends have underscored the potential importance
of the international dimension of contemporary monetary policy. Such trends include the
following: 
? Financial markets continue to become increasingly integrated internationally; capital
is evermore mobile. 
? The U.S. dollar continues to remain the world's principal international (key, reserve,
and vehicle) currency despite evolving exchange rate arrangements. 
? Official and unofficial dollarization continues in several emerging market economies. 
These trends suggest that monetary policy may have differing transmission mechanisms
increasingly involving international variables than was earlier the case. In addition to
these trends, empirical evidence recently has accumulated showing that changes in U.S.
monetary policy can significantly impact emerging market economies in a number of ways.
For example, changes in U.S. monetary policy can (1) dominate capital flows in emerging
market economies, (2) be associated with financial crises in these countries, and (3)
significantly impact interest rates and financial markets in emerging economies under
differing exchange rate arrangements. Furthermore, experience shows that the Federal
Reserve can successfully assume international lender-of-last-resort responsibilities and
stabilize world financial markets in situations of international liquidity crises. 
Implications for U.S. Monetary Policy 
Several important implications for U.S. monetary policy emerge from these trends and
growing empirical evidence. They include the following: 
? Given capital mobility and the practical reality that political pressures will dictate
a preference for domestic monetary policy goals, the policy trilemma for the U.S. boils
down to flexible exchange rate arrangements and a price stability objective for monetary
policy. 
? The Federal Reserve cannot deviate from or lose sight of its price stability goal, and
the Federal Reserve should not sacrifice domestic for other goals. Nonetheless, it may be
desirable to recognize the significant, increasingly important international
repercussions of changes in U.S. monetary policy in order to better achieve these
domestic goals. Recognizing these repercussions and their potentially important feedback
effects suggest that changes in U.S. monetary policy may be more potent and wide-ranging
than earlier believed. Consequently, to best achieve domestic goals in a nondisruptive
manner, the degree or speed of policy moves may need to be adjusted accordingly. 
If these increasingly important repercussions and their potential feedback effects (e.g.
changes in exports, import prices, or capital flows) can be identified, anticipated, and
taken into account, their effects potentially may be offset, resulting in smoother
transitions for the domestic economy and for financial markets. By taking these effects
into account, implementation of policy changes can result in a less volatile, less
costly, less disruptive outcome. Policy implementation may be improved. In short,
informal inflation targeting by the Federal Reserve may be implemented in a way that
recognizes international concerns. 
? Recognizing these growing international impacts of changes in monetary policy suggests
that in order for the Federal Reserve to best achieve its goals, policy changes may need
to be undertaken in a well-telegraphed, gradual, deliberate manner so that no policy
surprises or unanticipated repercussions occur, disrupting international and domestic
markets. In short, to promote stability, the Federal Reserve may be well advised whenever
possible to avoid sharp, rapid, and unexpected policy changes. 
? The Federal Reserve should increasingly recognize international LOLR responsibilities
and be prepared to respond to international liquidity crises.34 
? These international factors may best be taken into account by maintaining a stable
price environment and carefully, jointly monitoring forward-looking market prices such as
various bilateral and broad trade-weighted measures of the dollar exchange rate,
commodity prices, and bond yields as policy indicators. These market price indicators may
in turn be supplemented by various measures of global prices, world commodity prices, and
global bond yields to gain information about prospective global price movements, global
price expectations, and world liquidity.35
Dr. Robert E. Keleher
Chief Macroeconomist to the Vice Chairman 
Endnotes 
1. For a discussion of these responsibilities, see Robert E. Keleher, An International
Lender of Last Resort, the IMF, and the Federal Reserve, Joint Economic Committee,
February 1999. 
2. The word integration denotes the bringing together of parts into a whole. The more
integrated markets are, the more they behave as a unified whole, rather than segmented
parts. Financial market integration increases the degree of interdependence among
financial markets and such integration is alternatively defined as (1) the extent to
which markets are connected, (2) the degree of responsiveness and sensitivity to foreign
disturbances, or (3) the degree of openness. 
3. See, for example, Maurice Obstfeld, The Global Capital Market: Benefactor of Menace?,
Journal of Economic Perspectives, Volume 12, Number 4, Fall 1998, pp.9-30; Maurice
Obstfeld and Alan M. Taylor, The Great Depression as a Watershed: International Capital
Mobility over the Long Run, in The Defining Moment: The Great Depression and the American
Economy in the Twentieth Century, Edited by Michael D. Bordo, Claudia Goldin, and Eugene
N. White, University of Chicago Press, Chicago, 1998, pp.353-402. 
4. See Barry Eichengreen, Toward A New International Financial Architecture, Institute
for International Economics, Washington DC, 1999, pp.2-3. 
5. See, for example, Eichengreen, op. cit., p.3 
6. Obstfeld, (1998) op. cit., pp.14-5. 
7. These might take the form of currency boards or dollarization regimes. 
8. Obstfeld, 1998, op. cit., p.18. 
9. For an alternative perspective, see Jeffrey Frankel, No Single Currency Regime is
Right for All Countries of at All Times, NBER Working Paper 7338, September 1999. 
10. Inflation targeting in and of itself does not have to be exclusively inward looking
in the U.S., but instead can be implemented in a way that recognizes international
concerns (see below). 
11. See, for example, Barry Eichengreen, Globalizing Capital, Princeton University Press,
Princeton, 1996, p.195. 
12. R.A. Mundell, The Future of the Exchange Rate System, paper prepared for the Rocca di
Salimbeni Conference, Monte dei Paschi di Siene, Siena, Italy, November 24, 1994, p.12
(parentheses added). 
13. See Ronald McKinnon, Mundell, the Euro, and the World Dollar Standard, paper prepared
for presentation at the American Economic Association, January 8, 2000, pp.8-10, and
Philipp Hartmann, Currency Competition and Foreign Exchange Markets: The Dollar, the Yen,
and the Euro, Cambridge University Press, Cambridge, 1998, pp. 35-39, especially Chapter
2. 
14. See Robert E. Keleher, An International Lender of Last Resort, the IMF, and the
Federal Reserve Joint Economic Committee, February, 1999. 
15. See Kurt Schuler, Basics of Dollarization, JEC Staff Report, July 1999. 
16. See, for example, Richard D. Porter and Ruth A. Judson, The Location of U.S.
Currency: How much is Abroad? Federal Reserve Bulletin, October 1996, pp.883-903. 
17. Guillermo Calvo, Leonard Leiderman, and Carmen Reinhart, Inflows of Capital to
Developing Countries in the 1990s, Journal of Economic Perspectives, Volume 10, Number 2,
Spring 1996, p. 126. 
18. Morris Goldstein and Philip Turner, Banking Crises in Emerging Economies: Origins and
Policy Options, B.I.S. Economic Papers No. 46, October 1996, p. 10. 
19. Guillermo Calvo, Leonard Leiderman, and Carmen Reinhart, Capital Inflows and Real
Exchange Rate Appreciation in Latin America, IMF Staff Papers, Vol. 40, No. 1, March
1993, pp. 108-151; Michael Dooley, Eduardo Fernandez-Arias, and Kenneth Kletzer, Recent
Private Capital Flows to Developing Countries: Is the Debt Crisis History?, NBER Working
Paper, No. 4792, July 1994; Punam Chuhan, Stijn Claessens, and Nlandu Mamingi, Equity and
Bond Flows to Asia and Latin America: The Role of Global and Country Factors, Policy
Research Working Papers, International Economics Department, World Bank, WPS 1160, July
1993; Morris Goldstein, Coping With Too Much of a Good Thing, Policy Research Working
Paper 1597, International Economics Department, The World Bank, September 1995; Eduardo
Fernandez-Arias, The New Wave of Private Capital Inflows: Push or Pull? Policy Research
Working Paper 1312, The World Bank, November 1994.; Barry Eichengreen, Trends and Cycles
in Foreign Lending, in Horst Siebert (ed.), Capital Flows in the World Economy, Tubingen;
Mohr, 1991, pp. 3-28; Barry Eichengreen and Albert Fishlow, Contending With Capital
Flows: What is Different About the 1990s? A Council on Foreign Relations Paper, 1996. 
20. Barry Eichengreen and Andrew K. Rose, Staying Afloat When the Wind Shifts: External
Factors and Emerging-Markets Banking Crises, NBER Working Paper 6370, January 1998, pp.
5, 6 (parentheses added). 
21. Jeffrey A. Frankel and Andrew K. Rose, Currency Crashes in Emerging Markets: An
Empirical Treatment, Journal of International Economics, 41, Nos. 3/4, November 1996, pp.
351-366. 
22. Graciela L. Kaminsky and Carmen M. Reinhart, The Twin Crises: The Causes of Banking
and Balance Payments Problems, International Finance Discussion Papers, Federal Reserve
Board, 1996-554, p. 8. 
23. Roberto Chang and Andres Velasco, The Asian Liquidity Crisis, NBER Working Paper
6796, November 1998 (quoted from abstract). 
24. Changes in the foreign exchange value of the dollar can importantly reflect changes
in U.S. monetary policy. 
25. See Joseph Whitt, The Role of External Shocks in the Asian Financial Crisis, Economic
Review, Federal Reserve Bank of Atlanta, Second Quarter 1999, pp. 18-31, and studies
cited therein (p. 24). 
26. See also Ronald I. McKinnon, Euroland and East Asia in a Dollar-Based System, The
International Economy, September/October 1999, p. 45, 67. 
27. See Jeffrey A. Frankel, No Single Currency Regime is Right for All Countries,
Testimony before the Subcommittee on Domestic and International Monetary Policy of the
Committee on Banking and Financial Services, U.S. House of Representatives, May 21,
1999(a); Jeffrey A. Frankel, No Single Currency Regime is Right for All Countries or at
All Times, NBER Working Paper 7338, September 1991(b); Jeffrey A. Frankel and Chudozie
Okongwu, Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization,
Expectations, and the Incompleteness of Interest Rate Convergence, International Journal
of Finance and Economics, Vol. 1, No. 1, January 1996, pp. 1-23; and Ricardo Hausmann,
Michael Gavin, Carmen Pages-Serra, and Ernesto Stein, Financial Turmoil and the Choice of
Exchange Rate Regime, Inter-American Development Bank, Office of Chief Economist, Working
Paper #400, 1999. The discussion here follows Frankel 1999(a). 
28. See Frankel 1999(a), pp. 7-8; and Frankel 1999 (b), p. 22. 
29. See, for example, Minutes of the Federal Open Market Committee, Federal Reserve
Bulletin, January 1999, p. 45. 
30. Sinai was quoted in Gerald Baker, Man of the Year Alan Greenspan: Guardian Angel of
the Financial Markets, Financial Times, December 24, 1998, p. 9. 
31. Baker, ibid. 
32. Stanley Fischer, On the Need for an International Lender of Last Resort, paper
prepared for delivery at the American Economic Association, New York, January 3, 1999. 
33. It should be noted that key market price indicators (i.e., commodity prices, bond
yields, and the foreign exchange value of the dollar) were signaling the Federal Reserve
to ease at the time and broad measures of price inflation were benign. 
34. For a discussion of these responsibilities and ways to implement them, see Keleher
op. cit., p. 9. 
35. See discussion in Keleher, op. cit., p.9. 
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