Template-Type: ReDIF-Paper 1.0
Title: The International Monetary Transmission
Mechanism
Author-Name: Santiago Camara
Author-Name: Lawrence Christiano
Author-Name: Husnu Dalgic
Author-Email: dalgic@uni-mannheim.de

Classification-JEL: E44, F41, F32, E52
Keywords: US Monetary Policy Spillovers. Exchange Rate OvershooƟng. Financial FricƟons. Trade and
Monetary Policy Transmission

Abstract: Time series analysis shows that a US monetary tightening leads to economic contractions in
non‐US countries. We develop small economy models that capture these spillover effects
onto Advanced Economies (AE) and Emerging Market Economies (EME). Using
counterfactual experiments, we idendify the decline in US imports as the primary mechanism
by which a US monetary contraction affects other economies. We also document that EMEs
exhibit more pronounced contractions compared with AEs. Counterfactual experiments
attribute this to a lower share of dollar borrowing in AEs. We find that financial frictions
(including frictions needed to explain deviations from uncovered purchasing power parity)
are important to understanding the propagation of US monetary shocks. Finally, our findings
suggest that FX interventions are relatively ineffective at insulating an economy against US
monetary policy shocks, though they are very effective for dealing with ‘noise’ shocks in
financial markets


Note: 
Length: 92
Creation-Date: 2024-11
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp608
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_608