Global Spillovers of the Fed Information Effect

This paper sheds light on the open-economy dimension of the Fed information effect by evaluating its international spillovers on exchange rates, capital flows, and global economic activity. We provide empirical evidence that in response to unexpected increases in the Federal funds rate associated with Fed information shocks, the dollar depreciates instead of appreciating. This phenomenon is associated with a systematic response of investors’ risk appetite to Federal Open Market Committee (FOMC) announcements. Expansionary Fed information shocks are associated with an increase in investors’ risk appetite and capital inflows into emerging markets. Conversely, contractionary Fed information shocks are associated with a decrease in investors’ risk appetite and drive capital towards the US, causing an appreciation of the dollar vis-à-vis foreign currencies. We provide evidence that the Fed information effect is associated with significant spillovers onto global equity prices, cross-border credit, and ultimately, on global economic activity. These findings highlight the presence of global spillovers of the Fed information effect.