Central bankers must consider the effects of foreign financial markets and monetary policies on their domestic economies, no matter how large. This interdependence stems from the globalization of commodities and financial markets, and that economic entities often buy and sell assets denominated in various currencies. Exchange rates become important drivers of the supply and demand for many financial instruments and other internationally traded goods, which can influence the domestic money supply. Thus, foreign exchange rates become an additional monetary policy variable for many central banks.
Countries vary in how large their import and export sectors are as a share of their overall economy. Whereas imports ...
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