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The International Monetary Transmission Mechanism

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  • Santiago Camara
  • Lawrence Christiano
  • Husnu Dalgic

Abstract

Time series analysis shows that a US monetary tightening leads to economic contractions in non‐US countries. We develop small economy models that capture these spillover effects onto Advanced Economies (AE) and Emerging Market Economies (EME). Using counterfactual experiments, we idendify the decline in US imports as the primary mechanism by which a US monetary contraction affects other economies. We also document that EMEs exhibit more pronounced contractions compared with AEs. Counterfactual experiments attribute this to a lower share of dollar borrowing in AEs. We find that financial frictions (including frictions needed to explain deviations from uncovered purchasing power parity) are important to understanding the propagation of US monetary shocks. Finally, our findings suggest that FX interventions are relatively ineffective at insulating an economy against US monetary policy shocks, though they are very effective for dealing with ‘noise’ shocks in financial markets

Suggested Citation

  • Santiago Camara & Lawrence Christiano & Husnu Dalgic, 2024. "The International Monetary Transmission Mechanism," CRC TR 224 Discussion Paper Series crctr224_2024_608, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2024_608
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    References listed on IDEAS

    as
    1. Gourinchas, Pierre-Olivier & Ray, Walker & Vayanos, Dimitri, 2022. "A Preferred-Habitat Model of Term Premia, Exchange Rates, and Monetary Policy Spillovers," CEPR Discussion Papers 17119, C.E.P.R. Discussion Papers.
    2. Adrien Auclert & Matthew Rognlie & Martin Souchier & Ludwig Straub, 2021. "Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel," NBER Working Papers 28872, National Bureau of Economic Research, Inc.
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    4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    5. Lawrence Christiano & Husnu Dalgic & Armen Nurbekyan, 2021. "Financial Dollarization in Emerging Markets: Efficient Risk Sharing or Prescription for Disaster?," CRC TR 224 Discussion Paper Series crctr224_2021_306, University of Bonn and University of Mannheim, Germany.
    6. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-931, November.
    7. Eichengreen, Barry & Gupta, Poonam, 2015. "Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets," Emerging Markets Review, Elsevier, vol. 25(C), pages 1-15.
    8. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-948, November.
    9. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
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    More about this item

    Keywords

    US Monetary Policy Spillovers. Exchange Rate OvershooƟng. Financial FricƟons. Trade and Monetary Policy Transmission;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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