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The Open Economy Consequences of U.S. Monetary Policy

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  • John C. Bluedorn
  • Christopher Bowdler

Abstract

A failure to identify movements in the federal funds rate that are both unpredictable and independent of other determinants of open economy variables may lead to attenuation bias in the estimated effects of U.S. monetary policy on the exchange rate and foreign variables. Using a U.S. monetary policy measure which isolates unpredictable and independent federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices. We compare our results with those obtained using identification based upon: (1) non-recursive VAR restrictions; and, (2) restrictions derived from high frequency asset price behavior.

Suggested Citation

  • John C. Bluedorn & Christopher Bowdler, 2006. "The Open Economy Consequences of U.S. Monetary Policy," Economics Series Working Papers 265, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:265
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper265.pdf
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    References listed on IDEAS

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    Cited by:

    1. Georgiadis, Georgios, 2016. "Determinants of global spillovers from US monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 41-61.
    2. John C. Bluedorn & Christopher Bowdler & Christoffer Koch, 2017. "Heterogeneous Bank Lending Responses to Monetary Policy: New Evidence from a Real-Time Identification," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 95-149, February.
    3. Tervala, Juha, 2013. "Learning by devaluating: A supply-side effect of competitive devaluation," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 275-290.
    4. repec:eee:inecon:v:107:y:2017:i:c:p:1-18 is not listed on IDEAS
    5. Georgiadis, Georgios, 2015. "To bi, or not to bi? Differences in spillover estimates from bilateral and multilateral multi-country models," Working Paper Series 1868, European Central Bank.
    6. Delis, Manthos D & Hasan, Iftekhar & Mylonidis, Nikolaos, 2011. "The risk-taking channel of monetary policy in the USA: Evidence from micro-level data," MPRA Paper 34084, University Library of Munich, Germany.
    7. Bluedorn, John & Bowdler, Christopher, 2006. "Open economy codependence: US monetary policy and interest rate pass-through," Discussion Paper Series In Economics And Econometrics 615, Economics Division, School of Social Sciences, University of Southampton.
    8. Manthos D. Delis & Iftekhar Hasan & Nikolaos Mylonidis, 2017. "The Risk‐Taking Channel of Monetary Policy in the U.S.: Evidence from Corporate Loan Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(1), pages 187-213, February.
    9. Engler, Philipp, 2011. "Monetary policy and unemployment in open economies," Discussion Papers 2011/24, Free University Berlin, School of Business & Economics.
    10. Tervala, Juha, 2012. "International welfare effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 356-376.
    11. repec:eee:ecofin:v:42:y:2017:i:c:p:70-88 is not listed on IDEAS
    12. Bluedorn, John & Bowdler, Christopher, 2006. "Open economy codependence: US monetary policy and interest rate pass-through," Discussion Paper Series In Economics And Econometrics 0615, Economics Division, School of Social Sciences, University of Southampton.
    13. Choi, Woon Gyu & Kang, Taesu & Kim, Geun-Young & Lee, Byongju, 2017. "Global liquidity transmission to emerging market economies, and their policy responses," Journal of International Economics, Elsevier, vol. 109(C), pages 153-166.
    14. Georgios Georgiadis, 2016. "To bi, or not to bi? Differences in Spillover Estimates from Bilateral and Multilateral Multi-country Models," EcoMod2016 9145, EcoMod.
    15. Mahdi Barakchian, S., 2015. "Transmission of US monetary policy into the Canadian economy: A structural cointegration analysis," Economic Modelling, Elsevier, vol. 46(C), pages 11-26.
    16. Max Hanisch, 2017. "US Monetary Policy and the Euro Area," Discussion Papers of DIW Berlin 1701, DIW Berlin, German Institute for Economic Research.
    17. Yoshiyuki Fukuda & Yuki Kimura & Nao Sudo & Hiroshi Ugai, 2013. "Cross-country Transmission Effect of the U.S. Monetary Shock under Global Integration," Bank of Japan Working Paper Series 13-E-16, Bank of Japan.
    18. Tervala, Juha, 2014. "Teaching business cycles with the IS-TR model," MPRA Paper 58992, University Library of Munich, Germany.
    19. repec:seb:journl:v:15:y:2017:i:2:p:147-174 is not listed on IDEAS
    20. Tervala, Juha, 2014. "China, the Dollar Peg and U.S. Monetary Policy," MPRA Paper 53223, University Library of Munich, Germany.

    More about this item

    Keywords

    Open economy monetary policy identification; Exchange rate adjustment; Interest rate pass-through;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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