US sneezing and Australian colds: economic spillovers in both conventional and unconventional monetary policy times

We provide new evidence on U.S. monetary policy spillovers to Australia using an integrated time–frequency connectedness framework. Spillovers primarily transmit through the interest rate (policy rate) channel, followed by the asset price (with the consumer discretionary sector as the main conduit) channel and the exchange rate channel. Spillovers are highly time-varying, peaking at the onset of COVID-19 and again during the global financial crisis and the European sovereign debt crisis. Linking these spillovers to the real economy, we show that an identified U.S. tightening is followed by a tightening in Australia’s monetary policy stance and generates contractionary and disinflationary effects on Australian output and inflation, consistent with transmission via imported financial conditions and the domestic policy reaction. Finally, we show that ignoring spillovers yields a price puzzle under recursive VAR identification, while using spillover-based surprises as external instruments removes the puzzle and recovers theory-consistent responses.