Do economists understand the post-recession world?

It’s unclear whether monetary policy actions taken in America affect advanced versus emerging market countries in the same ways, said Federal Reserve Chair Janet Yellen in a speech this afternoon.

Also, says Yellen, the Fed is unsure to what extent U.S. interest rates and financial conditions are influenced by easing measures abroad.

Yellen’s speech examined topics such as how financial sectors interact with economies, what really drives inflation, and whether more research is needed on the relationship between supply and demand.

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Finding answers to these questions is important, she adds, because “extreme economic events have often challenged existing views of how the economy works and [they’ve] exposed shortcomings in the collective knowledge of economists.”

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She predicts the financial crisis and its aftermath might prove to be a turning point in how the economy is studied, just as the Great Depression and the stagflation crisis of the 1970s encouraged experts to think of new ways to foresee and handle crises.

The good news

What we do know is monetary policy actions in one country often spill over to other economies through three main channels, says Yellen. Those channels are:

• changes in exchange rates;
• changes in domestic demand, which can alter the economy’s imports; and
• changes in domestic financial conditions, such as interest rates and asset prices, that can affect financial conditions abroad.

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Further, U.S. monetary policy spillovers to other economies tend to be positive, she noted in her speech, citing research by Federal Reserve staff.

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That research finds policies designed to lift the U.S. economy also boost activity abroad, “as negative effects of dollar depreciation are offset by positive effects of higher U.S. imports and easier foreign financial conditions.” Read the full speech.

Rate hike hints?

In her speech, Yellen didn’t hint at when to expect a rate hike.

So, while “the tone of recent Fed communications have been decidely more hawkish about a near-term rate hike, today’s comments […] didn’t add much clarity surrounding the exact timing of further tightening,” says CIBC’s Royce Mendes in a research note.

But, says Mendes, “while Yellen did point out some of the longer-term reasons for keeping interest rates lower than in previous cycles, she didn’t give any indication that she’s opposed to the market interpreting recent Fed communications as signaling a rate hike is imminent this year.”

He finds, “The dovish tilt in her remarks has been positive for fixed income and negative for the U.S. dollar, but hasn’t done anything to alter our call for a rate hike in December.”

Read: Fed minutes put November rate hike on the table