Does it matter if the Fed goes conventional or unconventional?

We investigate the domestic and international consequences of three types of Fed monetary policy instruments: conventional interest rate (IR), forward guidance (FG) and large scale asset purchases (LSAP). We document empirically that they can be seen as close substitutes when used to meet macroeconomic stabilization objectives in the US, but have markedly different spillovers to other countries. This is because each of the three monetary policy instruments transmits differently to asset prices and exchange rates of small open economies. The LSAP by the Fed lowers the term premia both in the US and in other countries, and results in bigger exchange rate adjustments compared to conventional policy. Importantly for international spillovers, LSAP is typically associated with a more accommodative reaction of other countries' monetary authorities, especially in emerging market economies. We demonstrate how these findings can be rationalized within a stylized dynamic theoretical framework featuring a simple form of international bond market segmentation.