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Global financial transmission of monetary policy shocks

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  • Ehrmann, Michael
  • Fratzscher, Marcel

Abstract

The paper shows that US monetary policy has been an important determinant of global equity markets. Analysing 50 equity markets worldwide, we find that returns fall on average around 3.8% in response to a 100 basis point tightening of US monetary policy, ranging from a zero response in some to a reaction of 10% or more in other countries, as well as significant cross-sector heterogeneity. Distinguishing different transmission channels, we find that in particular the transmission via US and foreign short-term interest rates and the exchange rate play an important role. As to the determinants of the strength of transmission to individual countries, we test the relevance of their macroeconomic policies and the degree of real and financial integration, thus linking the strength of asset price transmission to underlying trade and asset holdings, and find that in particular the degree of global integration of countries JEL Classification: F36, F30, G15

Suggested Citation

  • Ehrmann, Michael & Fratzscher, Marcel, 2006. "Global financial transmission of monetary policy shocks," Working Paper Series 616, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2006616
    Note: 203739
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    More about this item

    Keywords

    advanced economies; emerging market economies.; financial integration; global financial markets; monetary policy; transmission; United States;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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