Working Paper: CEPR ID: DP15740
Authors: Ethan Ilzetzki; Keyu Jin
Abstract: 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 the 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.
Keywords: monetary; international spillovers; exchange rates; international financial intermediation
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. federal funds rate increases (E52) | dollar appreciation (F31) |
| dollar appreciation (F31) | decline in industrial production abroad (F44) |
| U.S. federal funds rate increases (E52) | decline in industrial production abroad (F44) |
| U.S. federal funds rate increases (E52) | dollar depreciation (F31) |
| dollar depreciation (F31) | increase in foreign output (F69) |
| U.S. federal funds rate increases (E52) | increase in foreign output (F69) |