Working Paper: CEPR ID: DP17682
Authors: Julian di Giovanni; John Rogers
Abstract: This paper uses cross-country firm-level data to explore the impact of U.S. monetary policy shocks on firms’ sales, investment, and employment. We estimate a significant impact of U.S. monetary policy on the average foreign firm, while controlling for other macroeconomic and financial variables like the VIX and exchange rate fluctuations that accompany U.S. monetary policy changes. We then estimate the role of international trade exposure and financial constraints in transmitting monetary policy shocks to firms, allowing for a better identification of the importance of external demand effects and the financial channel. We first exploit cross-country sector-level data on intermediate and final goods to show that greater global production linkages amplify the impact of U.S. monetary policy at the firm level. We then show that the impact varies along the firm-level distribution of proxies for firms' financial constraints (e.g., size and net worth), with the impact being significantly attenuated for less constrained firms.
Keywords: US monetary policy; spillovers; foreign firms; international production linkages; financial constraints
JEL Codes: E52; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy tightening (E52) | investment ratios of foreign firms (F23) |
| US monetary policy tightening (E52) | sales ratios of foreign firms (F23) |
| US monetary policy tightening (E52) | employment growth of foreign firms (F23) |
| US monetary policy tightening (greater financial constraints) (E49) | investment ratios of foreign firms (F23) |
| US monetary policy tightening (less financial constraints) (E49) | investment ratios of foreign firms (F23) |
| trade exposure (F14) | transmission of monetary policy shocks to foreign firms (F42) |
| intermediate goods trade (F19) | effects of US monetary policy (E52) |
| financial constraints (H60) | impact of US monetary policy shocks on investment (E22) |