The Transmission Mechanisms of International Business Cycles: International Trade and the Foreign Effects of US Monetary Policy

This paper studies the channels through which shocks from one country transmit in the global economy. Using local projections with instrumental variables (LP-IV), we document significant effects of US monetary shocks on output, interest rates, and trade flows in a large panel of countries. We find s...

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Bibliographic Details
Published in:IMF economic review 2023-03, Vol.71 (1), p.300-325
Main Authors: Bräuning, Falk, Sheremirov, Viacheslav
Format: Article
Language:English
Subjects:
Accounting
Analysis
Business cycles
Capital Markets
Econometric models
Econometrics
Economic Policy
Economics
Economics and Finance
Estimates
Evaluation
Federal Reserve monetary policy
GDP
Global economy
Gross Domestic Product
Heterogeneity
Interest rates
International aspects
International business
International Economics
International trade
Macroeconomics/Monetary Economics//Financial Economics
Monetary policy
Research Article
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Summary:This paper studies the channels through which shocks from one country transmit in the global economy. Using local projections with instrumental variables (LP-IV), we document significant effects of US monetary shocks on output, interest rates, and trade flows in a large panel of countries. We find substantial heterogeneity in the foreign output responses depending on international trade. This association is due to the output share of international trade (extensive margin) and not the elasticity of trade (intensive margin), the exchange rate, or the foreign interest rate responses. To distinguish between the direct and indirect transmission of shocks, we further collect detailed data on bilateral trade linkages and combine the LP-IV approach with spatial econometric models. The indirect spillovers account for nearly half of the total response of foreign output, indicating substantial amplification engendered by the trade network. But the heterogeneity in the total effects is almost entirely due to the direct effects. Moreover, accounting for network effects within this framework leads to estimates of the mean output response up to one-third larger in magnitude than in the nonspatial specifications. Thus, studies that do not explicitly model cross-country linkages may present an incomplete view of international business cycles.
ISSN:2041-4161
2041-417X
DOI:10.1057/s41308-022-00179-3