The puzzling change in the international transmission of U.S. macroeconomic policy shocks

We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income...

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Bibliographic Details
Published in:Journal of international economics 2021-05, Vol.130, p.103444, Article 103444
Main Authors: Ilzetzki, Ethan, Jin, Keyu
Format: Article
Language:English
Subjects:
Analysis
Emerging markets
Exchange rates
Foreign exchange
Global economy
Interest rates
International spillovers
Macroeconomics
Monetary policy
Money
Prices and rates
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Summary:We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2021.103444