The Open Economy Consequences of U.S. Monetary Policy

John Bluedorn and Christopher Bowdler ()

No 265, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: A failure to identify movements in the federal funds rate that are both unpredictable and independent of other determinants of open economy variables may lead to attenuation bias in the estimated effects of U.S. monetary policy on the exchange rate and foreign variables. Using a U.S. monetary policy measure which isolates unpredictable and independent federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices. We compare our results with those obtained using identification based upon: (1) non-recursive VAR restrictions; and, (2) restrictions derived from high frequency asset price behavior.

Keywords: Open economy monetary policy identification; Exchange rate adjustment; Interest rate pass-through (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Date: 2006-06-01
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn, nep-mac and nep-mon
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Related works:
Journal Article: The open economy consequences of U.S. monetary policy (2011)
Working Paper: The Open Economy Consequences of U.S. Monetary Policy (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:265

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