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The Open Economy Consequences of U.S. Monetary Policy

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Author Info
John Bluedorn
Christopher Bowdler

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Abstract

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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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 265.

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Date of creation: 2006
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Handle: RePEc:oxf:wpaper:265

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Related research
Keywords: Open Economy Monetary Policy Identification; Exchange Rate Adjustment; Interest Rate Pass-through;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  14. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February. [Downloadable!] (restricted)
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  1. Bluedorn, John & Bowdler, Christopher, . "Open Economy Codependence: U.S. Monetary Policy and Interest Rate Pass-through," Discussion Paper Series In Economics And Econometrics 0615, Economics Division, School of Social Sciences, University of Southampton. [Downloadable!]
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