Therefore, foreign interest rates are very likely to have to rise with U.S. rates in this case. The restraining effect of the rise in foreign interest rates will be reinforced by the effect of the deceleration in U.S. demand for foreign goods induced by the slowdown in U.S. income.
As a result, a tightening of monetary policy is likely to have an unambiguously restrictive impact on those countries whose exchange rates are pegged to the dollar. For countries with floating exchange rates, on the other hand, the exchange rate and income effects of rising U.S. interest rates are likely to be offsetting.