The International Credit Channel of U.S. Monetary Policy and Financial Shocks

We provide novel evidence on the existence of an `international credit chan- nel' for the transmission of US shocks across borders. Using a two-country SVAR for the U.S. and the U.K., we show that U.S. monetary policy shocks, identified using high frequency surprises around policy announcements as external instruments, can significantly affect credit spreads in both coun- tries, but less so U.K. economic activity. We then recover a U.S. financial shock, which we identify within the same model using sign restrictions, and show that financial shocks are quickly transmitted internationally, with effects on credit spreads that are similar to the ones of monetary policy shocks. Unlike monetary policy shocks, however, financial shocks have a sizeable impact on economic activity and consumer prices in both coun- tries. Our results are in line with general equilibrium open economy models with credit market imperfections and a high degree of financial integration.