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What goes around comes around: How large are spillbacks from US monetary policy?

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  • Breitenlechner, Max
  • Georgiadis, Georgios
  • Schumann, Ben

Abstract

Spillovers from US monetary policy entail spillbacks to the domestic economy. Applying counterfactual analyses in a Bayesian proxy structural vector-autoregressive model we find that spillbacks account for a non-trivial share of the slowdown in domestic real activity following a contractionary US monetary policy shock. Spillbacks materialise as a monetary policy tightening depresses foreign sales and valuations of US firms so that Tobin’s q/cash flow and stock market wealth effects impinge on investment and consumption. Net trade does not contribute to spillbacks because US monetary policy affects exports and imports similarly. Geographically, spillbacks materialise through advanced rather than emerging market economies.

Suggested Citation

  • Breitenlechner, Max & Georgiadis, Georgios & Schumann, Ben, 2022. "What goes around comes around: How large are spillbacks from US monetary policy?," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 45-60.
    • Handle: RePEc:eee:moneco:v:131:y:2022:i:c:p:45-60
    DOI: 10.1016/j.jmoneco.2022.07.001
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    10. Allegret, Audrey & Allegret, Jean-Pierre & Ibrahim, Dalia, 2023. "Financial asymmetries between Euro area and the United States: An international political economy perspective," Journal of Policy Modeling, Elsevier, vol. 45(2), pages 266-285.
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    22. Antonia Lopez Villavicencio & Marc Pourroy, 2023. "Information Shocks in the U.S. and Asset Mispricing in Emerging Economies," EconomiX Working Papers 2023-19, University of Paris Nanterre, EconomiX.

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    13. Karau, Sören, 2024. "Relative monetary policy and exchange rates," Discussion Papers 40/2024, Deutsche Bundesbank.
    14. Kaminska, Iryna & Mumtaz, Haroon & Šustek, Roman, 2021. "Monetary policy surprises and their transmission through term premia and expected interest rates," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 48-65.
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    More about this item

    Keywords

    US monetary policy; Spillovers; Spillbacks; Bayesian proxy structural VAR models;
    All these keywords.

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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