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Monetary policy shocks and foreign investment income: Evidence from a large Bayesian VAR

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  • Auer, Simone

Abstract

This paper assesses the transmission of monetary policy in a large Bayesian vector autoregression based on the approach proposed by Banbura et al. (2010). The paper analyzes the impact of monetary policy shocks in the United States and Canada not only on a range of domestic aggregates, trade flows, and exchange rates, but also foreign investment income. The analysis provides three main results. First, a surprise monetary policy contraction has a statistically important impact on both gross and net foreign investment income flows in both countries. Against the background of growing foreign wealth and investment income, this result provides preliminary evidence that foreign balance-sheet channels might play an increasingly significant role for monetary transmission. Second, the impact of monetary policy on foreign investment income flows differs considerably across asset categories and over time, suggesting that the investment instruments and the currency denomination of a country’s foreign assets and liabilities are potentially relevant for the way in which monetary policy affects the domestic economy. Finally, the results support existing evidence on the effectiveness of large vector autoregressions and the Bayesian shrinkage approach in eliminating price and exchange rate puzzles.

Suggested Citation

  • Auer, Simone, 2019. "Monetary policy shocks and foreign investment income: Evidence from a large Bayesian VAR," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 142-166.
  • Handle: RePEc:eee:jimfin:v:93:y:2019:i:c:p:142-166
    DOI: 10.1016/j.jimonfin.2018.12.013
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    3. Kumar, Dr.B.Pradeep, 2014. "Access to Finance and Human Rights," MPRA Paper 80336, University Library of Munich, Germany, revised 2014.
    4. Georgios Georgiadis & Arnaud Mehl, 2015. "Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness," Globalization Institute Working Papers 222, Federal Reserve Bank of Dallas.
    5. Guney, Selin, 2015. "An evaluation of price forecasts of the cattle market under structural changes," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205109, Agricultural and Applied Economics Association.
    6. Agustín S. Bénétrix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.
    7. Georgiadis, Georgios & Mehl, Arnaud, 2016. "Financial globalisation and monetary policy effectiveness," Journal of International Economics, Elsevier, vol. 103(C), pages 200-212.
    8. Agustín S. Bénétrix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.

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    More about this item

    Keywords

    Monetary policy transmission; Foreign investment income; Bayesian VAR;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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