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

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  • Auer, Simone

    (Swiss National Bank)

Abstract

This paper assesses the transmission of monetary policy in a large Bayesian vector autoregression based on the approach proposed by Banbura, Giannone and Reichlin (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 action has a statistically and economically significant 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 important 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 addressing the curse of dimensionality and eliminating price and exchange rate puzzles.

Suggested Citation

  • Auer, Simone, 2014. "Monetary policy shocks and foreign investment income: evidence from a large Bayesian VAR," Globalization and Monetary Policy Institute Working Paper 170, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:170 DOI: 10.24149/gwp170
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    1. 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;Western Agricultural Economics Association.
    2. Agustín S. Bénétrix & Philip R. Lane, "undated". "Cross-Country Exposures to the Swiss Franc," Trinity Economics Papers tep0116, Trinity College Dublin, Department of Economics.
    3. Kumar, Dr.B.Pradeep, 2014. "Access to Finance and Human Rights," MPRA Paper 80336, University Library of Munich, Germany, revised 2014.
    4. Georgiadis, Georgios & Mehl, Arnaud, 2016. "Financial globalisation and monetary policy effectiveness," Journal of International Economics, Elsevier, pages 200-212.
    5. Georgiadis, Georgios & Mehl, Arnaud, 2015. "Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness," Globalization and Monetary Policy Institute Working Paper 222, Federal Reserve Bank of Dallas.

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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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

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