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The Puzzling Change in the International Transmission of US Macroeconomic Policy Shocks

In: NBER International Seminar on Macroeconomics 2020

Author

Listed:
  • Ethan Ilzetzki
  • Keyu Jin

Abstract

We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.
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Suggested Citation

  • Ethan Ilzetzki & Keyu Jin, 2020. "The Puzzling Change in the International Transmission of US Macroeconomic Policy Shocks," NBER Chapters, in: NBER International Seminar on Macroeconomics 2020, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:14515
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    JEL classification:

    • N0 - Economic History - - General
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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