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Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy

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  • Colin Gray

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Abstract

Between 2002 and 2006, the Federal Reserve set interest rates significantly below the rates suggested by well-known monetary policy rules. There is a growing body of research suggesting that this helped fuel an excess of liquidity in the U.S. that contributed to the 2008 worldwide financial crash. It is less well known that a number of other central banks also lowered interest rates during this period. An important question, then, is what role the Federal Reserve played in influencing other central banks to alter their own monetary policies, which could have magnified the Fed’s actions in creating global liquidity. This paper addresses the issue by showing how spillovers in central bank behavior occur in theoretical rational expectations models. It then establishes empirically how U.S. monetary policy actions affect the actions of other major central banks, particularly in terms of interest rates and currency interventions. The models and data suggest that the U.S. lowering its policy rate, either in general or in reference to a monetary policy rule, influences other central banks to lower their own policy rates and intervene in currency markets, even when controlling for worldwide macroeconomic trends. It thus appears that U.S. actions were a factor in the worldwide lowering of interest rates and the increase in currency reserves in the early 2000s that may have contributed to the subsequent global liquidity boom. Copyright International Atlantic Economic Society 2013

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File URL: http://hdl.handle.net/10.1007/s11293-012-9352-0
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Bibliographic Info

Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 41 (2013)
Issue (Month): 2 (June)
Pages: 173-184

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Handle: RePEc:kap:atlecj:v:41:y:2013:i:2:p:173-184

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Keywords: Monetary policy; Liquidity; Rational expectations; Taylor rule;

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  1. Monticini, Andrea & Peel, David & Vaciago, Giacomo, 2011. "The impact of ECB and FED announcements on the Euro interest rates," Economics Letters, Elsevier, vol. 113(2), pages 139-142.
  2. Ansgar Belke & Daniel Gros, 2005. "Asymmetries in Transatlantic Monetary Policy-making: Does the ECB Follow the Fed?," Journal of Common Market Studies, Wiley Blackwell, vol. 43(5), pages 921-946, December.
  3. Michael Ehrmann & Marcel Fratzscher, 2005. "Equal Size, Equal Role? Interest Rate Interdependence Between the Euro Area and the United States," Economic Journal, Royal Economic Society, vol. 115(506), pages 928-948, October.
  4. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, December.
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Cited by:
  1. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
  2. Ross Kendall & Tim Ng, 2013. "Estimated Taylor Rules updated for the post-crisis period," Reserve Bank of New Zealand Analytical Notes series AN2013/04, Reserve Bank of New Zealand.

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