Global spillovers of the Fed information effect
Marco Pinchetti () and
No 952, Bank of England working papers from Bank of England
This paper sheds lights on the open economy dimension of the Fed information effect, by evaluating its international spillovers on exchange rates, capital flows, and global economic activity. We provide empirical evidence that in response to unexpected increases in the Federal Funds rate associated with Fed information shocks, the dollar depreciates instead of appreciating. We show that this phenomenon occurs because Fed announcements affect investors’ risk appetite. Expansionary Fed information shocks increase investors’ risk appetite and drive capital towards foreign markets in pursuit of higher yields. Conversely, contractionary Fed information shocks decrease investors’ risk appetite and drive capital towards safe-haven currencies, causing an appreciation of the dollar and safe-haven currencies vis-à-visforeign currencies. We provide evidence that the Fed information effect is associated with large spillovers onto global safe-haven currencies, risk premia, cross-border credit, and ultimately, on global economic activity. These findings highlight the presence of global spillovers of the Fed information effect.
Keywords: Monetary policy; information effects; international spillovers; flight to quality; high-frequency identification; sign restrictions; bayesian VAR (search for similar items in EconPapers)
JEL-codes: E52 F31 F32 F41 F44 (search for similar items in EconPapers)
Pages: 31 pages
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0952
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