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Spillovers from US Monetary Shocks: Role of Policy Drivers and Cyclical Conditions

Author

Listed:
  • Arbatli-Saxegaard, Elif

    (Asian Development Bank Institute)

  • Furceri, Davide

    (Asian Development Bank Institute)

  • Gonzalez Dominguez, Pablo

    (Asian Development Bank Institute)

  • Ostry, Jonathan

    (Asian Development Bank Institute)

  • Peiris, Shanaka

    (Asian Development Bank Institute)

Abstract

We provide new evidence on the spillover effects from United States (US) interest rate changes, focusing on factors that are pertinent to the current conjuncture: weak recovery prospects in emerging market and developing economies (EMDEs), and the confluence of macroeconomic shocks shaping the path of interest rates in the US. The drivers of US monetary policy matter for the nature of spillovers. With an SVAR-IV model used to identify structural monetary policy, demand, and supply shocks, we find that an increase in US interest rates driven by demand shocks engenders a positive spillover to economic activity in the near term, while an exogenous tightening of monetary policy would have a large negative spillover effect. Spillovers from US monetary policy shocks also depend on the state of the business cycle, exerting larger effects when growth is weak outside the US. Finally, tighter US monetary policy affects the left tail of the growth distribution disproportionately: the fat left tail highlights the salience of growth at risk.

Suggested Citation

  • Arbatli-Saxegaard, Elif & Furceri, Davide & Gonzalez Dominguez, Pablo & Ostry, Jonathan & Peiris, Shanaka, 2022. "Spillovers from US Monetary Shocks: Role of Policy Drivers and Cyclical Conditions," ADBI Working Papers 1317, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:1317
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    More about this item

    Keywords

    US monetary policy; foreign spillovers;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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