Monetary Policy Spillovers through Invoicing Currencies

Tony Zhang

Journal of Finance, 2022, vol. 77, issue 1, 129-161

Abstract: This paper explores the role of trade invoicing currencies in the international spillover of monetary policy. Using high‐frequency measures of Federal Reserve monetary policy shocks, I show that exchange rates, interest rates, and equity returns in countries with a larger share of dollar‐invoiced imports systematically respond more to U.S. monetary policy. I document similar transmission effects from European Central Bank (ECB) monetary policy shocks to countries with euro‐invoiced imports. I rationalize these findings within a New Keynesian framework. As a result of these spillovers, domestic monetary policy should be less effective in countries with traded goods invoiced in foreign currencies.

Date: 2022
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https://doi.org/10.1111/jofi.13071

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:77:y:2022:i:1:p:129-161

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