The changing international transmission of U.S. monetary policy shocks: Is there evidence of contagion effect on OECD countries

Irfan Akbar Kazi, Hakimzadi Wagan and Farhan Akbar

Economic Modelling, 2013, vol. 30, issue C, 90-116

Abstract: We study the changing international transmission of U.S. monetary policy shocks to 14 OECD countries over the period 1981Q1–2010Q4. The U.S. monetary policy shock is defined as unexpected change in Effective Federal Funds Rate (FFR). We use a time varying parameter factor augmented VAR approach (TVP-FAVAR) to study the EFFR shocks together with a large data set of 265, major financial, macroeconomic and trade variables for U.S., Canada, France, Germany, Italy, UK, Japan, Australia, Spain, Norway, Sweden, Switzerland, Finland and New Zealand. Our main findings are as follows. First, negative U.S. monetary policy shocks have considerable negative impact on GDP growth in the U.S., Canada, Japan and Sweden while most of the other member countries benefits. Second, the transmission to GDP growth has increased in OECD countries since the early 1980s. We also detect a more depressed GDP over medium term in the U.S., Canada, Japan, Australia, Norway and Sweden over the recent global financial crisis. Third, the size of U.S. monetary policy shocks during financial turmoil periods were unusual than normal periods and varies overtime. The financial crisis (2008–2009) is evidenced by decline in residential investment in the U.S. and propagation of this shock to Canada, Germany, Japan, Switzerland and New Zealand over the recent period. U.S. monetary policy shocks reduce share prices in most of the OECD countries; this impact is more pronounced over the turmoil period. Asset prices, interest rates and trade channel seem to play major role in propagation of monetary policy shocks.

Keywords: Monetary policy shocks; Financial markets; International transmission channels; Global integration; Turmoil periods; Time varying parameter FAVAR (search for similar items in EconPapers)
JEL-codes: C3 C5 F1 F15 F4 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Working Paper: The changing international transmission of US monetary policy shocks: is there evidence of contagion effect on OECD countries (2012)
Journal Article: The changing international transmission of us monetary policy shocks: is there evidence of contagion effect on oecd countries (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:30:y:2013:i:c:p:90-116

DOI: 10.1016/j.econmod.2012.07.020

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