The puzzling change in the international transmission of U.S. macroeconomic policy shocks

Ethan Ilzetzki and Keyu Jin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.

Keywords: international spillovers; exchange rates (search for similar items in EconPapers)
JEL-codes: F3 G3 N0 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2021-05-01
New Economics Papers: this item is included in nep-fdg, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in Journal of International Economics, 1, May, 2021, 130. ISSN: 0022-1996

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Related works:
Journal Article: The puzzling change in the international transmission of U.S. macroeconomic policy shocks (2021)
Working Paper: The Puzzling Change in the International Transmission of U.S. Macroeconomic Policy Shocks (2021)
Chapter: The Puzzling Change in the International Transmission of US Macroeconomic Policy Shocks (2020)
Working Paper: The Puzzling Change In The International Transmission Of U.S. Macroeconomic Policy Shocks (2020)
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