<P> First, research suggests only a weak reflection of exchange rate movements in import prices, lending credibility to the opposed theory of local currency pricing (LCP). The consequence is a departure from the classical view in the form of a trade - off between output gaps and misalignments in international relative prices, shifting monetary policy to CPI inflation control and real exchange rate stabilization . </P> <P> Second, another specificity of international optimal monetary policy is the issue of strategic interactions and competitive devaluations, which is due to cross-border spillovers in quantities and prices . Therein, the national authorities of different countries face incentives to manipulate the terms of trade to increase national welfare in the absence of international policy coordination . Even though the gains of international policy coordination might be small, such gains may become very relevant if balanced against incentives for international noncooperation . </P> <P> Third, open economies face policy trade - offs if asset market distortions prevent global efficient allocation . Even though the real exchange rate absorbs shocks in current and expected fundamentals, its adjustment does not necessarily result in a desirable allocation and may even exacerbate the misallocation of consumption and employment at both the domestic and global level . This is because, relative to the case of complete markets, both the Phillips curve and the loss function include a welfare - relevant measure of cross-country imbalances . Consequently, this results in domestic goals, e.g. output gaps or inflation, being traded - off against the stabilization of external variables such as the terms of trade or the demand gap . Hence, the optimal monetary policy in this case consists of redressing demand imbalances and / or correcting international relative prices at the cost of some inflation . </P> <P> Corsetti, Dedola and Leduc (2011) summarize the status quo of research on international monetary policy prescriptions: "Optimal monetary policy thus should target a combination of inward - looking variables such as output gap and inflation, with currency misalignment and cross-country demand misallocation, by leaning against the wind of misaligned exchange rates and international imbalances ." This is main factor in country money status . </P>

What effect does a contractionary monetary policy in the us have on the foreign trade sector