Popular in Social Sciences

Banks and Policy Organisations

Macroeconomic modelling of CBDC: a critical review

European Central Bank Ulrich Bindseil

Social Identities and Divisions

A new explanation of antisemitism: Jew hatred as a civilisational phenomenon

Boston University Liah Greenfeld

Banks and Policy Organisations

Financing Private Credit

Federal Reserve Bank of New York Nina Boyarchenko

Economics

Failing Banks

Massachusetts Institute of Technology Emil Verner

Culture and Society

The City as a Growth Machine: Toward a Political Economy of Place

New York University Harvey Moltoch

American Politics

Keeping the Republic

Boston College Marc Landy

British Politics

Entrepreneurial thinking: the politics and practice of policy impact

University of Sheffield Matthew Flinders

Has Globalization Changed the International Transmission of U.S. Monetary Policy?

View more insights in Social Sciences - Economics - Macroeconomics

View more figures from Bocconi University

View the page of Maximilian Boeck

Read the Study

Next in Economics

The US-China Trade War and Global Reallocations

Penny Goldberg | Yale University

Efficient Likelihood Evaluation of State-Space Representations

David DeJong | University of Pittsburgh

Maximilian Boeck uses a time-varying parameter vector autoregression to study U.S. monetary policy’s worldwide spillovers as real and financial markets globalize.

Image courtesy of interviewee. February 5, 2024

Log-in or Sign-up to Faculti
Currently viewing this subject insight as a guest. You have insight(s) remaining for this month. Login to view 8000+ figures on the platform.

Generating Workspace...

Export as PDF

The study focuses on how globalization has impacted the international transmission of US monetary policy. It explores two key aspects: the role of the US dollar as a dominant global currency and the significant increase in trade and financial integration since the late 1980s and early 1990s until the Great Financial Crisis.

Key findings include:

1. **Monetary Policy Transmission**: The US dollar significantly influences global trade and financial activities, affecting countries that trade in dollars even if they do not directly engage with the US economy.

2. **Globalization Trends**: Trade and financial integration have risen sharply over the years, leading to anticipated changes in how US monetary policy impacts the global economy. After the financial crisis, however, indicators of trade and financial integration plateaued, potentially leading to reduced or stable effects on international transmission.

3. **Increased Spillovers**: The research highlights that the spillover effects of US monetary policy have increased over time, particularly regarding industrial production and global economic activity.

4. **Channel Investigation**: The study delves into whether trade or financial channels more significantly explain the observed time variations in these effects. Findings suggest that while both channels are crucial, the trade channel plays a more dominant role in accounting for time variations in policy impact.

5. **Policy Implications**: The implications of the research suggest that foreign central banks should consider the changes in spillover effects when designing their policies relative to the Federal Reserve. Conversely, the US Federal Reserve should also acknowledge the reverse spillover effects impacting the US economy when making monetary policy decisions.

Overall, the study highlights the evolving nature of international monetary policy transmission in the context of globalization and emphasizes the importance of both trade and financial channels in understanding this dynamic.

Language:

Export as PDF

X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.000 --> 00:01.365
The context of our study,

00:01.385 --> 00:04.125
has globalization changed the international transmission

00:04.125 --> 00:05.205
of US monetary policy?

00:05.745 --> 00:09.245
Uh, it's basically that we want to look how the, the process

00:09.305 --> 00:10.525
of globalization has,

00:10.625 --> 00:13.445
has changed this international transmission of,

00:13.445 --> 00:14.605
of US monetary policy.

00:14.945 --> 00:18.125
So first off, why do we look at, at the US monetary policy,

00:18.705 --> 00:19.765
and,

00:19.825 --> 00:24.045
and the reason being that the US dollar is a so-called

00:24.565 --> 00:26.205
dominant currency around the globe.

00:26.385 --> 00:28.885
So we could also look for example, at other,

00:29.105 --> 00:30.605
at other policy actions

00:30.605 --> 00:34.045
of other central banks like the Euro area with the ECB or,

00:34.045 --> 00:35.205
or, or,

00:35.305 --> 00:38.485
at the Japanese n which are also important currencies,

00:38.785 --> 00:42.205
but they are dominant only in a, in a more local sense.

00:42.305 --> 00:43.685
For example, in the context of Europe,

00:43.715 --> 00:44.725
this would be Eastern Europe.

00:44.725 --> 00:47.725
There the Euro is heavily used in, in trading worlds,

00:48.025 --> 00:50.365
but the dollar is used internationally,

00:50.875 --> 00:54.365
both quite heavily in, the denomination of assets

00:54.365 --> 00:57.485
and liabilities and also in the invoicing of trade.

00:58.065 --> 01:00.605
And this makes it such an interesting case

01:01.025 --> 01:03.125
for US monetary policy,

01:03.225 --> 01:07.205
how the international transmission, works also in a,

01:07.205 --> 01:09.285
in a, on a global sense, particularly

01:09.285 --> 01:13.085
because if two, two countries, doing trade

01:13.085 --> 01:15.925
with each other, invoicing in dollar not necessarily

01:15.925 --> 01:18.845
involving the us, this can also be affected by US

01:19.365 --> 01:22.805
monetary policy actions, which does nothing have to do with

01:22.805 --> 01:24.205
with the US economy itself.

01:25.025 --> 01:28.285
And the second point is, the process of globalization.

01:28.545 --> 01:29.965
So how has this changed over time?

01:30.465 --> 01:34.085
Um, and here our main motivation is that trade

01:34.205 --> 01:37.285
and financial integration have substantially risen since

01:37.285 --> 01:38.765
the, since the late eighties

01:39.105 --> 01:41.285
or early nineties, exactly

01:41.695 --> 01:44.005
until about the great financial crisis.

01:44.545 --> 01:47.765
So what we've seen here is a vast increase in,

01:47.765 --> 01:50.725
in trade integration defined as, exports

01:50.725 --> 01:52.005
and imports as well, GDP

01:52.385 --> 01:55.805
and also in financial integration, the same in world GDP

01:55.805 --> 01:56.845
of, of financial assets.

01:57.605 --> 01:58.785
Uh, and, and

01:58.785 --> 02:02.665
therefore we think that this could also drastically alter

02:03.045 --> 02:04.745
the international transmission effects

02:04.745 --> 02:05.865
of US monetary policy.

02:06.325 --> 02:09.345
Uh, and with respect to the last term, what happens

02:09.345 --> 02:11.225
after the great financial crisis is

02:11.495 --> 02:14.105
that both these indicators kind of flatten out.

02:14.445 --> 02:17.025
So in this process, we call usually in economics

02:17.045 --> 02:20.625
as globalization, so slowing down of the process

02:20.725 --> 02:22.105
of globalization, and

02:22.105 --> 02:24.945
therefore we also expect that the effects then get,

02:25.055 --> 02:28.105
smaller or, or, stay the same in terms of the,

02:28.285 --> 02:29.465
in terms of the literature.

02:29.485 --> 02:31.545
But where our, study is,

02:31.645 --> 02:34.265
is contributing is mainly to two areas.

02:34.845 --> 02:38.545
Uh, so the first one being the literature on examining the

02:38.545 --> 02:40.745
international transmission of US monetary policy,

02:41.325 --> 02:43.345
our contribution years that we look at

02:43.345 --> 02:44.905
to the time varying dimension of this,

02:44.905 --> 02:46.265
of this international transmission.

02:46.725 --> 02:48.705
And the second contribution we have in the papers

02:48.735 --> 02:51.585
that we also con contribute to the, to the literature,

02:51.755 --> 02:55.505
which examines already the, time varying dimension

02:55.505 --> 02:56.545
of US monetary policy.

02:56.925 --> 02:58.425
But most of these papers

02:58.675 --> 03:00.965
Focus only exclusively on the US economy

03:01.345 --> 03:04.525
and do not target, the, the international level.

03:04.825 --> 03:07.605
So we kind of try to bridge these two literatures.

03:07.945 --> 03:11.205
Um, and, and there are a couple of papers doing that,

03:11.225 --> 03:14.125
but what, what we are doing is also, investigating way

03:14.125 --> 03:15.205
that this financial

03:15.505 --> 03:17.365
or this trade,

03:17.555 --> 03:19.925
channel is more important in explaining

03:19.925 --> 03:21.005
also the time variation.

03:21.005 --> 03:22.885
So this is our, our main contribution

03:22.885 --> 03:24.085
with respect to the literature.

03:24.335 --> 03:26.525
Maybe also a few words on

03:26.715 --> 03:28.405
what the literature so far has found.

03:28.465 --> 03:29.845
So there are a myriad

03:29.845 --> 03:31.645
of papers looking at the international transmission

03:31.645 --> 03:32.645
of US monetary policy

03:32.945 --> 03:34.365
or also the international transmission

03:34.365 --> 03:36.845
of other policy actions of other central banks.

03:37.225 --> 03:38.525
And they find all, find

03:38.715 --> 03:42.205
that they have quite substantial internationals below us.

03:42.205 --> 03:45.005
So in the global integrated world, the,

03:45.145 --> 03:49.085
the policy actions transmit on a, on a global level, then,

03:49.705 --> 03:52.525
scholars like, like papers of, of,

03:52.705 --> 03:55.325
the berry Hong Enrico have showed

03:55.755 --> 03:58.685
that if we look into this international transmission

03:58.685 --> 04:01.725
of US monetary policy, how does these effects transmit?

04:02.025 --> 04:05.565
And usually what these papers find are two broad channels.

04:05.745 --> 04:09.125
So either be a trade effects, so be a trade

04:09.125 --> 04:12.165
of US economy itself, be a trade of third country,

04:12.165 --> 04:15.485
third country trade, not involving theirs also via commodity

04:15.485 --> 04:17.805
prices or the second channel being,

04:17.905 --> 04:19.085
the financial channel.

04:19.585 --> 04:22.325
And, and with respect to this, this second channel,

04:23.325 --> 04:25.165
I think one should also mention the work of,

04:25.345 --> 04:27.845
of Helene Ray on the global financial cycle.

04:28.265 --> 04:30.365
So what, what the idea is that there is a,

04:30.385 --> 04:32.965
exists a global financial cycle kind of

04:33.565 --> 04:35.485
representing global risk aversion

04:35.625 --> 04:38.965
and US monetary policy strongly affecting this global

04:39.075 --> 04:40.245
risk aversion factor.

04:40.785 --> 04:43.845
Uh, and it depresses this global risk aversion factor.

04:44.185 --> 04:46.885
So what what this means is if there's a tightening

04:46.885 --> 04:48.125
of US monetary policy

04:48.225 --> 04:50.325
as we have experienced in the last 18 months,

04:50.875 --> 04:54.125
then global risk aversion is, is going up.

04:54.265 --> 04:57.565
So investors are less likely to invest more and

04:57.565 --> 04:59.005
therefore investment is ed.

04:59.005 --> 05:01.725
And this also has done, ramifications

05:01.745 --> 05:03.205
for global economic activity

05:03.575 --> 05:05.405
after the, the description of the model

05:05.405 --> 05:08.165
and identification of the, of the causal effects.

05:08.705 --> 05:11.565
Uh, what kind of data are we using in, in the model?

05:11.945 --> 05:15.645
Uh, and we are using six variables free on the US economy,

05:15.955 --> 05:17.085
free on the global economy.

05:17.625 --> 05:21.515
Um, and in terms of the US economy, we are using,

05:21.595 --> 05:23.875
a short-term interest rate, the federal funds rate extended

05:23.875 --> 05:25.275
with the shadow rate,

05:25.275 --> 05:27.155
because we're not interested in, in the effects

05:27.275 --> 05:28.795
of unconventional monetary policy.

05:29.455 --> 05:31.395
We have US consumer prices in India,

05:31.535 --> 05:34.595
and we have also US economic activity as measured

05:34.615 --> 05:36.155
by industrial production India.

05:36.735 --> 05:40.835
Um, and in terms of the global variables, we have the rest

05:40.835 --> 05:42.715
of world industrial production series

05:43.175 --> 05:45.835
and the rest of world export series as a measure

05:45.955 --> 05:47.315
of rest of world trade.

05:47.655 --> 05:49.515
So rest of world here means,

05:49.515 --> 05:51.595
everything excluding the us.

05:52.635 --> 05:56.975
And then the last variables is our financial variable,

05:57.005 --> 05:58.805
which is the global financial cycle variable.

05:58.845 --> 06:01.725
I was talking earlier about, also in terms

06:01.745 --> 06:03.805
of these indicators of the rest of world.

06:04.115 --> 06:07.285
They are coming from the, the global, database

06:07.285 --> 06:09.165
of global economic indicators from the Federal

06:09.165 --> 06:10.525
Reserve Bank of Dallas.

06:11.145 --> 06:14.365
In terms of the results, what, what we are finding is, first

06:14.365 --> 06:17.845
of all, if we just take a a plain vanilla linear model,

06:18.155 --> 06:20.365
then we have corroborating evidence

06:20.465 --> 06:21.605
to the previous literature.

06:21.745 --> 06:25.565
So we find that a tightening of US monetary policy leads

06:25.565 --> 06:28.405
to a downturn in US, consumer prices,

06:28.785 --> 06:32.485
in US economic activity, and also on, on a global level.

06:32.745 --> 06:36.405
We have a downturn in, rest of world's trade

06:36.625 --> 06:38.965
and rest of world, economic activity.

06:39.105 --> 06:41.805
And it depresses the global financial cycl factor.

06:42.505 --> 06:45.405
So just also, for clarification, rest

06:45.405 --> 06:47.885
of world here means everything besides the us.

06:48.665 --> 06:52.115
Um, and when we look at the, at the model

06:52.115 --> 06:54.195
with the time variation, what we find is

06:54.195 --> 06:56.755
that these effects grew stronger over time,

06:57.295 --> 06:58.795
and this holds true for basically

06:58.815 --> 07:00.035
all the variables in the system.

07:00.375 --> 07:03.555
So the effects grew stronger over time from the,

07:03.845 --> 07:07.795
early nineties to the great financial crisis, 2008, 2009.

07:08.295 --> 07:10.235
So this effects more than double over time.

07:10.695 --> 07:13.315
Uh, and then afterwards we see a flattening out

07:13.375 --> 07:15.115
or even a rebound of these effects.

07:15.615 --> 07:16.715
And what this means is

07:16.715 --> 07:19.555
that we exactly find in the time wearing parameter framework

07:19.855 --> 07:22.875
the exact same pattern as we have found in the financial

07:22.895 --> 07:24.835
and the trade integration series describing

07:24.835 --> 07:25.955
the process of globalization.

07:25.975 --> 07:28.475
So we also find this globalization period

07:29.295 --> 07:31.355
and the globalization period both

07:31.935 --> 07:34.995
in the data without imposing any additional restrictions.

07:35.735 --> 07:39.235
Um, and in, in, in con contrasting these,

07:39.235 --> 07:40.555
these different effects, we find

07:40.555 --> 07:43.435
that global economic activity and also global trade

07:43.535 --> 07:47.695
or rest of world to be precise, is, is is

07:48.215 --> 07:50.975
reacting much more stronger in 2008 than in the beginning

07:50.975 --> 07:52.375
of the sample in the early nineties.

07:52.835 --> 07:55.175
And we find also this for the global financial cycling.

07:55.515 --> 07:58.975
But if we do some significance testing, then we find

07:58.975 --> 08:02.575
that the, the statistical significance of the differences

08:02.575 --> 08:05.975
between these two time periods only holds for rest

08:05.975 --> 08:09.295
of world trade and also for rest of world economic activity,

08:09.675 --> 08:12.735
but not so for financial, for the financial linkages,

08:13.005 --> 08:16.175
meaning that the time variation in financial linkages is

08:16.285 --> 08:17.415
much less pronounced.

08:18.035 --> 08:20.295
Uh, and from that we start off

08:20.315 --> 08:23.215
of thinking which channel is actually important

08:23.235 --> 08:24.935
and driving these time variation.

08:25.435 --> 08:28.015
Uh, is it a trade channel or is it a financial channel?

08:28.075 --> 08:30.295
And we cannot conclude this just from this exercise.

08:30.675 --> 08:34.015
So what we are doing is we also want

08:34.015 --> 08:35.815
to exploit cross-sectional variation.

08:36.235 --> 08:38.535
So we have this rest of world economic activity

08:38.555 --> 08:42.215
or industrial production series, which consists, of,

08:42.355 --> 08:44.055
of underlying industrial country

08:44.375 --> 08:45.895
specific contract production series.

08:46.195 --> 08:48.415
And the Federal Reserve Bank of Dallas gave us the,

08:48.415 --> 08:49.655
the underlying raw data.

08:50.075 --> 08:51.255
And we use,

08:51.405 --> 08:53.935
this country specific industrial production series

08:53.995 --> 08:56.445
to re-estimate the model 24 times

08:56.945 --> 08:58.565
for each country respectively.

08:59.025 --> 09:01.125
And then we can examine,

09:01.415 --> 09:03.365
which country has strong effects

09:03.385 --> 09:05.285
or which country has less strong effects.

09:05.305 --> 09:07.605
And we have some cross-sectional variation which we can

09:07.605 --> 09:10.125
exploit and this cross-sectional variation.

09:10.125 --> 09:11.605
Then we relate to this trade

09:11.605 --> 09:14.085
and financial integration, indicators.

09:14.545 --> 09:16.845
And what we find is that if we take the average

09:16.945 --> 09:20.125
of the effects of one country to the financial

09:20.125 --> 09:21.325
and trade integration series,

09:21.755 --> 09:24.245
that we find a strong negative relationship,

09:24.315 --> 09:27.685
meaning a country which is more financially

09:27.745 --> 09:31.645
or trade integrated, has more negative spillover

09:31.785 --> 09:34.325
to economic activity to a neg

09:34.325 --> 09:35.845
to a tightening of monetary policy.

09:36.425 --> 09:38.325
Uh, so this is basically expected,

09:38.505 --> 09:40.485
and this corroborates the previous

09:40.485 --> 09:41.565
findings in the literature.

09:41.905 --> 09:45.405
But what we can also do is since we have the effects also

09:45.405 --> 09:47.445
over time, we can also look

09:48.525 --> 09:51.145
how is the change in the effects related

09:51.285 --> 09:53.745
to the change in financial and trade integration.

09:54.085 --> 09:55.985
And what we find here is

09:56.845 --> 09:59.695
that there's a negative relationship with trade integration

09:59.695 --> 10:01.855
with the change in trade integration, meaning

10:01.885 --> 10:04.935
that if there's a stronger change in trade integration over

10:04.935 --> 10:07.215
time, then there is also a stronger change in

10:07.275 --> 10:08.415
the spillovers over time.

10:09.115 --> 10:12.615
But we do not find, as relationship with,

10:12.615 --> 10:13.895
with financial integration.

10:14.515 --> 10:17.575
So, what we conclude from this picture is

10:18.085 --> 10:21.575
that the evidence suggests that trade integration is

10:22.205 --> 10:24.935
more important in explaining the time variation than

10:24.935 --> 10:26.655
financial integration,

10:26.955 --> 10:28.815
or the trade channel and the financial channel.

10:29.435 --> 10:33.585
Um, but on average, both these channels, trade

10:33.585 --> 10:35.985
and financial, are indeed important as,

10:36.005 --> 10:37.945
as has been found in the, in the previous future.

10:38.565 --> 10:42.945
Um, and then as a last exercise, what we are doing is

10:42.945 --> 10:44.105
because it could well be

10:44.105 --> 10:47.585
that the underlying financial multiplier is just time

10:47.585 --> 10:49.585
varying, and we, and we just do not see

10:49.655 --> 10:51.745
that there additional spiller was generated

10:51.765 --> 10:53.145
by the financial linkages.

10:53.845 --> 10:55.545
Uh, we use the same model

10:55.545 --> 10:57.945
and identify global financial cycle shock.

10:58.205 --> 11:00.345
So we shock global financial conditions

11:00.685 --> 11:03.865
and then examine the outcomes on, on industrial production,

11:04.085 --> 11:05.705
on rest of all industrial production.

11:05.965 --> 11:07.705
And what we find here is basically

11:08.225 --> 11:11.585
a relatively constant effect over time, slowly increasing,

11:11.685 --> 11:14.185
but relatively constant meaning

11:14.185 --> 11:17.145
that the financial multiplier has not changed over time.

11:17.565 --> 11:20.225
And then we can also use this global financial condition

11:20.235 --> 11:24.705
shock to shut down the transmission mechanism via financial

11:24.705 --> 11:27.105
linkages in the original baseline model.

11:27.565 --> 11:30.705
So there we can then basically do a counterfactual

11:30.705 --> 11:34.145
experiment where to a mon to a tightening

11:34.145 --> 11:37.825
of monetary policy, we shut down all the transmission via

11:37.825 --> 11:41.065
financial linkages using this additional shock series.

11:41.485 --> 11:43.385
Uh, and if we do that, we find

11:43.385 --> 11:46.985
that there is still time variation left in the rest

11:46.985 --> 11:48.465
of World Industrial Production series.

11:48.885 --> 11:51.945
Uh, and therefore, this leads us to conclude

11:51.945 --> 11:54.605
that the evidence suggests the trade channel is,

11:54.675 --> 11:56.125
more important in explaining the time

11:56.125 --> 11:57.365
variation in the financial channel.

11:57.985 --> 12:00.685
In this paper, what, what we are looking, is

12:01.065 --> 12:03.885
how globalization has changed international

12:03.885 --> 12:05.165
transmission of monetary policy.

12:05.345 --> 12:07.965
We investigate this question in a time wearing parameter

12:07.965 --> 12:10.045
framework, and we find that these

12:10.615 --> 12:13.285
spillovers have substantially increased over time,

12:13.925 --> 12:15.965
specifically on industrial production

12:15.985 --> 12:17.685
or rest of world industrial production.

12:18.185 --> 12:20.445
Uh, and in, as soon

12:20.445 --> 12:23.085
as we investigate which channel is driving these effects,

12:23.505 --> 12:24.885
so the trade channel

12:24.945 --> 12:27.045
or the financial channel, the evidence suggest

12:27.045 --> 12:30.285
that both channels are important on average,

12:30.985 --> 12:33.565
but just the trade channel is,

12:33.565 --> 12:35.565
explaining the time duration in terms

12:35.565 --> 12:36.805
of policy implications.

12:37.105 --> 12:40.125
Our reach research highlights, two policy implications,

12:40.305 --> 12:43.205
one of the perspective of, foreign central banks,

12:43.505 --> 12:45.245
not the US Central Bank,

12:45.515 --> 12:48.765
that they can tailor their policy actions,

12:49.155 --> 12:51.845
more towards the policy actions of the Federal Reserve.

12:51.895 --> 12:54.965
Since the Federal Reserve has kind of the, the role

12:54.985 --> 12:57.815
of a global banker, and if they know

12:57.815 --> 12:59.695
that these belows have increased over time due

12:59.695 --> 13:03.175
to globalization, they can also, mitigate,

13:03.175 --> 13:04.935
additional risk, which may stem from the

13:04.935 --> 13:06.215
tightening side you're right now.

13:06.915 --> 13:09.495
And also in terms of the Federal Reserve,

13:09.835 --> 13:12.575
the policy implication of our research is that

13:13.435 --> 13:16.775
if the US policy actions generated,

13:16.865 --> 13:20.335
increasing spillovers over time, then some

13:20.335 --> 13:23.495
of the spillovers are also spilling back to the US economy.

13:23.915 --> 13:26.415
So also affecting, again, the US economy.

13:26.515 --> 13:29.295
And also this should be taking into account when conducting

13:29.815 --> 13:30.375
monetary policy.

Impact of Globalization on US Monetary Policy

00:00:00 - The context of our study, has globalization changed the international transmission of US monetary policy? it's basically that we want to look how the, the process of globalization has, has changed this international transmission of, of US monetary policy. So first off, why do we look at, at the US monetary policy, and, and the reason being that the US dollar is a so-called dominant currency around the globe. So we could also look for example, at other, at other policy actions of other central banks like the Euro area with the ECB or,
00:00:35 - at the Japanese n which are also important currencies, but they are dominant only in a, in a more local sense. For example, in the context of Europe, this would be Eastern Europe. There the Euro is heavily used in, in trading worlds, but the dollar is used internationally, both quite heavily in, the denomination of assets and liabilities and also in the invoicing of trade. And this makes it such an interesting case for US monetary policy, how the international transmission, works also in a,
00:01:09 - because if two, two countries, doing trade with each other, invoicing in dollar not necessarily involving the us, this can also be affected by US monetary policy actions, which does nothing have to do with with the US economy itself. And the second point is, the process of globalization. So how has this changed over time? and here our main motivation is that trade and financial integration have substantially risen since
00:01:39 - or early nineties, exactly until about the great financial crisis. So what we've seen here is a vast increase in, in trade integration defined as, exports and imports as well, GDP and also in financial integration, the same in world GDP of, of financial assets. and, and therefore we think that this could also drastically alter the international transmission effects of US monetary policy. and with respect to the last term, what happens
00:02:11 - that both these indicators kind of flatten out. So in this process, we call usually in economics as globalization, so slowing down of the process of globalization, and therefore we also expect that the effects then get, smaller or, or, stay the same in terms of the, in terms of the literature. But where our, study is, is contributing is mainly to two areas. so the first one being the literature on examining the international transmission of US monetary policy,
00:02:43 - to the time varying dimension of this, of this international transmission. And the second contribution we have in the papers that we also con contribute to the, to the literature, which examines already the, time varying dimension of US monetary policy. But most of these papers Focus only exclusively on the US economy and do not target, the, the international level. So we kind of try to bridge these two literatures. and, and there are a couple of papers doing that, but what, what we are doing is also, investigating way

Trade Channel Importance in Monetary Policy Transmission

00:03:15 - or this trade, channel is more important in explaining also the time variation. So this is our, our main contribution with respect to the literature. Maybe also a few words on what the literature so far has found. So there are a myriad of papers looking at the international transmission of US monetary policy or also the international transmission of other policy actions of other central banks. And they find all, find that they have quite substantial internationals below us. So in the global integrated world, the,
00:03:49 - scholars like, like papers of, of, the berry Hong Enrico have showed that if we look into this international transmission of US monetary policy, how does these effects transmit? And usually what these papers find are two broad channels. So either be a trade effects, so be a trade of US economy itself, be a trade of third country, third country trade, not involving theirs also via commodity
00:04:17 - the financial channel. And, and with respect to this, this second channel, I think one should also mention the work of, of Helene Ray on the global financial cycle. So what, what the idea is that there is a, exists a global financial cycle kind of representing global risk aversion and US monetary policy strongly affecting this global risk aversion factor. and it depresses this global risk aversion factor. So what what this means is if there's a tightening
00:04:48 - as we have experienced in the last 18 months, then global risk aversion is, is going up. So investors are less likely to invest more and therefore investment is ed. And this also has done, ramifications for global economic activity after the, the description of the model and identification of the, of the causal effects. what kind of data are we using in, in the model? and we are using six variables free on the US economy, free on the global economy.
00:05:21 - a short-term interest rate, the federal funds rate extended with the shadow rate, because we're not interested in, in the effects of unconventional monetary policy. We have US consumer prices in India, and we have also US economic activity as measured by industrial production India. and in terms of the global variables, we have the rest of world industrial production series and the rest of world export series as a measure of rest of world trade.
00:05:49 - everything excluding the us. And then the last variables is our financial variable, which is the global financial cycle variable. I was talking earlier about, also in terms of these indicators of the rest of world. They are coming from the, the global, database of global economic indicators from the Federal Reserve Bank of Dallas. In terms of the results, what, what we are finding is, first of all, if we just take a a plain vanilla linear model,

Impact of US Monetary Policy on Global Economy

00:06:20 - to the previous literature. So we find that a tightening of US monetary policy leads to a downturn in US, consumer prices, in US economic activity, and also on, on a global level. We have a downturn in, rest of world's trade and rest of world, economic activity. And it depresses the global financial cycl factor. So just also, for clarification, rest of world here means everything besides the us.
00:06:52 - with the time variation, what we find is that these effects grew stronger over time, and this holds true for basically all the variables in the system. So the effects grew stronger over time from the, early nineties to the great financial crisis, 2008, 2009. So this effects more than double over time. and then afterwards we see a flattening out or even a rebound of these effects. And what this means is that we exactly find in the time wearing parameter framework
00:07:22 - and the trade integration series describing the process of globalization. So we also find this globalization period and the globalization period both in the data without imposing any additional restrictions. and in, in, in con contrasting these, these different effects, we find that global economic activity and also global trade or rest of world to be precise, is, is is reacting much more stronger in 2008 than in the beginning
00:07:52 - And we find also this for the global financial cycling. But if we do some significance testing, then we find that the, the statistical significance of the differences between these two time periods only holds for rest of world trade and also for rest of world economic activity, but not so for financial, for the financial linkages, meaning that the time variation in financial linkages is much less pronounced. and from that we start off of thinking which channel is actually important
00:08:25 - is it a trade channel or is it a financial channel? And we cannot conclude this just from this exercise. So what we are doing is we also want to exploit cross-sectional variation. So we have this rest of world economic activity or industrial production series, which consists, of, of underlying industrial country specific contract production series. And the Federal Reserve Bank of Dallas gave us the, the underlying raw data. And we use, this country specific industrial production series
00:08:56 - for each country respectively. And then we can examine, which country has strong effects or which country has less strong effects. And we have some cross-sectional variation which we can exploit and this cross-sectional variation. Then we relate to this trade and financial integration, indicators. And what we find is that if we take the average of the effects of one country to the financial and trade integration series, that we find a strong negative relationship,

Importance of Trade Integration in Monetary Policy

00:09:27 - or trade integrated, has more negative spillover to economic activity to a neg to a tightening of monetary policy. so this is basically expected, and this corroborates the previous findings in the literature. But what we can also do is since we have the effects also over time, we can also look how is the change in the effects related to the change in financial and trade integration. And what we find here is
00:09:59 - with the change in trade integration, meaning that if there's a stronger change in trade integration over time, then there is also a stronger change in the spillovers over time. But we do not find, as relationship with, with financial integration. So, what we conclude from this picture is that the evidence suggests that trade integration is more important in explaining the time variation than financial integration,
00:10:29 - but on average, both these channels, trade and financial, are indeed important as, as has been found in the, in the previous future. and then as a last exercise, what we are doing is because it could well be that the underlying financial multiplier is just time varying, and we, and we just do not see that there additional spiller was generated by the financial linkages. we use the same model and identify global financial cycle shock.
00:11:00 - and then examine the outcomes on, on industrial production, on rest of all industrial production. And what we find here is basically a relatively constant effect over time, slowly increasing, but relatively constant meaning that the financial multiplier has not changed over time. And then we can also use this global financial condition shock to shut down the transmission mechanism via financial linkages in the original baseline model. So there we can then basically do a counterfactual
00:11:34 - of monetary policy, we shut down all the transmission via financial linkages using this additional shock series. and if we do that, we find that there is still time variation left in the rest of World Industrial Production series. and therefore, this leads us to conclude that the evidence suggests the trade channel is, more important in explaining the time variation in the financial channel. In this paper, what, what we are looking, is
00:12:03 - transmission of monetary policy. We investigate this question in a time wearing parameter framework, and we find that these spillovers have substantially increased over time, specifically on industrial production or rest of world industrial production. and in, as soon as we investigate which channel is driving these effects, so the trade channel or the financial channel, the evidence suggest that both channels are important on average, but just the trade channel is,

Policy Implications of US Monetary Spillovers

00:12:35 - of policy implications. Our reach research highlights, two policy implications, one of the perspective of, foreign central banks, not the US Central Bank, that they can tailor their policy actions, more towards the policy actions of the Federal Reserve. Since the Federal Reserve has kind of the, the role of a global banker, and if they know that these belows have increased over time due to globalization, they can also, mitigate, additional risk, which may stem from the
00:13:29 - And also in terms of the Federal Reserve, the policy implication of our research is that if the US policy actions generated, increasing spillovers over time, then some of the spillovers are also spilling back to the US economy. So also affecting, again, the US economy. And also this should be taking into account when conducting monetary policy.

Faculti AI can make mistakes

Faculti

Popular in Social Sciences

Macroeconomic modelling of CBDC: a critical review

Financing Private Credit

Failing Banks

The City as a Growth Machine: Toward a Political Economy of Place

Keeping the Republic

Entrepreneurial thinking: the politics and practice of policy impact

Has Globalization Changed the International Transmission of U.S. Monetary Policy?

Next in Economics

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Page Structure

Popular in Social Sciences

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Accessibility Options

Contrast Adjustment

Text Size Adjustment

Text Spacing Adjustment

Line Height Adjustment

Cursor Size Adjustment

Page Structure Options

Page Structure