Heterogeneous effects in the international transmission of the US monetary policy: a factor-augmented VAR perspective

Abstract

This paper analyses the international transmission of US monetary policy shocks. We use a time-varying, factor-augmented VAR framework to examine how and to what extent the propagation of US policy shocks affects the South East Asian (SEA) and European Union (EU) economies, through various transmission channels. We find that in the SEA economies, the income absorption effect is the most pronounced channel as indicated by the significant worsening of the trade balance of these countries, which provokes a reduction in their output. In addition, wealth effects and the balance sheet channel have an important contribution in the transmission of the shock to these economies. In the EU, the initial rise observed in output as a result of the shock is driven more by exchange rate movements rather than movements in the trade balance. In terms of changes in the magnitude of the effect of the shock over time, we find that the deepening of global integration dampens the effect of the shock on the foreign economies in core macroeconomic and financial variables. Moreover, the impact of the shock on the foreign economies has increased in the post-crisis period.

Financial market spillovers of U.S. monetary policy shocks

“…More specifically, I extract the first principal component of cross-country asset prices of four asset types, overnight rates, 3-year bond yields, equity prices, and FX rates visà-vis the U.S. dollar. 54 In this way, the asset prices in open economies are represented as a FAVAR framework (as in Evgenidis et al, 2019;Spiegel & Tai, 2017), where domestic asset prices are represented by three types of variables (U.S., domestic, and world financial asset prices in the rest of the world). 55 The estimation results are reported in Figure A8.…”

Exchange Rate and Stock Markets During Trade Conflicts in the USA, China, and India

“…For example, Gómez-Zaldívar et al (2013) studied three explanatory stimuli and found that the exchange rate oscillations describe a key portion of the deviations in equity index returns for developed countries. Evgenidis et al (2019) empirically studied returns of 18 developed markets using multifactor asset pricing models. Factors selected for this study were global economic risks and it concluded that foreign exchange risk was the most decisive factor in defining international equity index returns.…”

International Transmission of Conventional and Unconventional Monetary Policy and Financial Stress Shocks from the Euro Area to Russia

“…Mohanty (2014) notes that central bank practitioners identify the adjustment in the exchange rate and the monetary policy rate as the prime channels of monetary policy transmission from advanced to emerging economies: the former is singled out as the main channel in economies with a floating exchange rate regime, the latter with a fixed exchange rate regime. Rey (2016) and Evgenidis et al (2019) point out that in a floating exchange rate regime, monetary policy impulses can exert influence on the trade balance of domestic and foreign economies in two opposing ways: demand-augmenting effects and expenditure-switching effects. A contractionary domestic monetary policy impulse weakens domestic demand including imports, which improves the domestic trade balance (demand-augmenting effect) and, at the same time, an increase in domestic policy rate may induce a real appreciation of the domestic currency, which in turn worsens the domestic trade balance (expenditure-switching effect) and affects other domestic and foreign macroeconomic variables (ibidem).…”