High-frequency and heteroskedasticity identification in multicountry models: Revisiting spillovers of monetary shocks

TL;DR

This paper investigates how monetary policy and central bank information shocks from the US and euro area transmit internationally, using a novel identification method to reveal significant spillovers and the US's dominant role.

Contribution

It introduces a new approach combining external instruments, heteroskedasticity, and sign restrictions for identifying structural shocks in a multicountry setting.

Findings

European and US monetary shocks have significant spillovers.

Information shocks have stronger effects than pure monetary policy shocks.

US dominance influences global spillover patterns.

Abstract

We explore the international transmission of monetary policy and central bank information shocks originating from the United States and the euro area. Employing a panel vector autoregression, we use macroeconomic and financial variables across several major economies to address both static and dynamic spillovers. To identify structural shocks, we introduce a novel approach that combines external instruments with heteroskedasticity-based identification and sign restrictions. Our results suggest significant spillovers from European Central Bank and Federal Reserve policies to each other's economies, global aggregates, and other countries. These effects are more pronounced for central bank information shocks than for pure monetary policy shocks, and the dominance of the US in the global economy is reflected in our findings.