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Spillovers from US monetary policy: Evidence from a time-varying parameter GVAR model

Jesus Crespo Cuaresma (), Gernot Doppelhofer (), Martin Feldkircher and Florian Huber

No 2018-6, Working Papers in Economics from University of Salzburg

Abstract: This paper develops a global vector autoregressive (GVAR) model with time-varying parameters and stochastic volatility to analyze whether international spillovers of US monetary policy have changed over time. The proposed model allows assessing whether coefficients evolve gradually over time or are better characterized by infrequent, but large breaks. Our findings point towards pronounced changes in the international transmission of US monetary policy throughout the sample period, especially so for the reaction of international output, equity prices, and exchange rates against the US dollar. In general, the strength of spillovers has weakened in the aftermath of the global financial crisis. Using simple panel regressions, we link the variation in international responses to measures of trade and financial globalization. We find that a broad trade base and a high degree of financial integration with the world economy tend to cushion risks stemming from a foreign shock such as a US monetary policy tightening, whereas a reduction in trade barriers and/or a liberalization of the capital account increase these risks.

Keywords: Spillovers; zero lower bound; globalization; mixture innovation models (search for similar items in EconPapers)
JEL-codes: C30 E52 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ets, nep-mac, nep-mon and nep-opm
Date: 2018-11-16
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