Financial globalisation, monetary policy spillovers and macro-modelling: tales from 1001 shocks
Georgios Georgiadis and
No 2082, Working Paper Series from European Central Bank
Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border ﬁnancial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful ﬁnancial spillover channels confound the eﬀects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we ﬁnd: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful ﬁnancial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to ﬁnancial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these ﬁndings applies to monetary policy shock estimates obtained from VAR and other statistical models, ﬁnancial market expectations and the narrative approach. JEL Classification: F42, E52, C50
Keywords: financial globalisation; monetary policy shocks; New Keynesian DSGE models; spillovers (search for similar items in EconPapers)
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Working Paper: Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172082
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