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Monetary policy spillovers: Is this time different?

Author

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  • Chen, Hongyi
  • Tillmann, Peter

Abstract

Monetary policy changes in the U.S. have important cross-border effects on small open economies. Since 2022, the Fed has tightened monetary policy considerably, yet it appears that spillovers on the rest of the world are smaller than in the past. We investigate this idea by analyzing the international propagation of Fed policy using a panel of advanced and emerging economies since 1994. We distinguish the current tightening cycle from previous ones and find that international spillovers from the 2022/3 U.S. monetary tightening episode are more benign than the historical average. We estimate smooth-transition local projections in which spillovers depend on the state of the U.S. business cycle. We find that if domestic demand in the U.S. is weak, international spillovers are large. However, spillovers are absent if demand in the U.S. remains strong. Hence, a “soft landing“ of the U.S. economy makes a difference for the magnitude of international spillovers from U.S. monetary policy to the rest of the world.

Suggested Citation

  • Chen, Hongyi & Tillmann, Peter, 2025. "Monetary policy spillovers: Is this time different?," Journal of International Money and Finance, Elsevier, vol. 152(C).
  • Handle: RePEc:eee:jimfin:v:152:y:2025:i:c:s0261560625000130
    DOI: 10.1016/j.jimonfin.2025.103278
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    More about this item

    Keywords

    Spillovers; Fed; Emerging markets; Financial integration; Global financial cycle;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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