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The Open Economy Consequences of U.S. Monetary Policy

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We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy's open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2006/w4/opecon-usmp.2006.06.01.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2006-W04.

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Length: 44 pages
Date of creation: 01 Jun 2006
Date of revision:
Handle: RePEc:nuf:econwp:0604

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Web page: http://www.nuff.ox.ac.uk/economics/

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Citations

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Cited by:
  1. Bluedorn, John C. & Bowdler, Christopher & Koch, Christoffer, 2014. "Heterogeneous bank lending responses to monetary policy: new evidence from a real-time identification," Working Papers 1404, Federal Reserve Bank of Dallas.
  2. Juha Tervala, 2011. "Learning by Devaluating: A Supply-Side Effect of Competitive Devaluation," Discussion Papers 67, Aboa Centre for Economics.
  3. Juha Tervala, 2011. "International Welfare Effects of Monetary Policy," Discussion Papers 66, Aboa Centre for Economics.
  4. Philipp Engler, 2011. "Monetary Policy and Unemployment in Open Economies," NCER Working Paper Series 77, National Centre for Econometric Research.
  5. Tervala, Juha, 2014. "China, the Dollar Peg and U.S. Monetary Policy," MPRA Paper 53223, University Library of Munich, Germany.
  6. Bluedorn, John & Bowdler, Christopher, 2006. "Open economy codependence: US monetary policy and interest rate pass-through," Discussion Paper Series In Economics And Econometrics 0615, Economics Division, School of Social Sciences, University of Southampton.
  7. John C Bluedorn & Christopher Bowdler & Christoffer Koch, 2013. "Heterogeneous Bank Lending Responses to Monetary Policy," IMF Working Papers 13/118, International Monetary Fund.
  8. Delis, Manthos D & Hasan, Iftekhar & Mylonidis, Nikolaos, 2011. "The risk-taking channel of monetary policy in the USA: Evidence from micro-level data," MPRA Paper 34084, University Library of Munich, Germany.

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