Working Paper: NBER ID: w23651
Authors: Elena Gerko; Hléne Rey
Abstract: The importance of financial markets and international capital flows have increased greatly since the 1990s. How does this affect the effectiveness of monetary policy? We analyse the transmission of monetary policy in two important financial centres, the United States and the United Kingdom. Studying the responses of mortgage and corporate spreads we find evidence in favour of an important financial channel in both countries. Our identification strategy allows us to study movements in the policy rates and the effect of forward guidance, broadly defined. We also analyse international financial spillovers, which we find to be asymmetric.
Keywords: Monetary Policy; Financial Markets; International Capital Flows
JEL Codes: E4; E52; E58; F41; F6; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Mortgage spreads (G21) |
| Monetary policy shocks (E39) | Corporate spreads (G19) |
| 20 basis point tightening in US one-year rate (E43) | Mortgage spreads (G21) |
| US monetary policy tightening (E52) | UK mortgage spreads (G21) |
| US monetary policy tightening (E52) | Appreciation of sterling against the dollar (F31) |
| UK monetary policy (E52) | US financial variables (E39) |