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Census Bureau Economics
26 May 2015
FED Vice-Chair on "The Federal Reserve and the Global Economy"
(click Fischer for full text)
I am happy to be here today, and I thank the organizers for inviting me.1 It is a particular pleasure to be back in Israel, where my career as a central banker began. At the Fed, I face a somewhat different set of responsibilities, and my lecture today is on the special challenges that face the Federal Reserve and the global economy in an increasingly interconnected world.2
Over the past 50 years, global trade has more than tripled relative to world gross domestic product (GDP), and the ratio of total exports to global GDP now stands at about 30 percent--though, interestingly, the rate of growth of global international trade has declined to the level of the growth rate of world GDP since the start of the Great Recession. International trade has not loomed as large in the U.S. national accounts as it has for many other countries, but it is an increasingly important driver of the U.S. economy, with the share of trade in U.S. GDP currently at about 15 percent.
Although the U.S. share of world GDP has gradually declined since the mid-20th century, the broader importance of the United States to the global economy has diminished less, as a result of increasing financial linkages. In particular, U.S. residents' ownership of private foreign assets has risen from 6.5 percent of U.S. annual GDP in 1950 to more than 140 percent of annual U.S. GDP (nearly $25 trillion), reflecting the leading role of U.S. capital markets in cross-border finance. Total foreign investment in the United States is even larger, at more than $30 trillion.
In a progressively integrating world economy and financial system, a central bank cannot ignore developments beyond its country's borders, and the Fed is no exception. This is true even though the Fed's statutory objectives are defined as specific goals for the U.S. economy. In particular, the Federal Reserve's objectives are given by its dual mandate to pursue maximum sustainable employment and price stability, and our policy decisions are targeted to achieve these dual objectives.3 Hence, at first blush, it may seem that there is little need for Fed policymakers to pay attention to developments outside the United States.
But such an inference would be incorrect. The state of the U.S. economy is significantly affected by the state of the world economy. A wide range of foreign shocks affect U.S. domestic spending, production, prices, and financial conditions. To anticipate how these shocks affect the U.S. economy, the Federal Reserve devotes significant resources to monitoring developments in foreign economies, including emerging market economies (EMEs), which account for an increasingly important share of global growth. The most recent available data show 47 percent of total U.S. exports going to EME destinations. And of course, actions taken by the Federal Reserve influence economic conditions abroad.4 Because these international effects in turn spill back on the evolution of the U.S. economy, we cannot make sensible monetary policy choices without taking them into account.
In this lecture, I would like to emphasize both aspects of our global connectedness--spillovers from the United States to foreign economies and the effect of foreign economies on the United States.
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FED speeches