US Spillovers of US Monetary Policy: Information effects & Financial Flows

TL;DR

This paper disentangles the effects of US monetary policy shocks and the Fed's information disclosures on global financial conditions, revealing that different components have opposite impacts on the economy, exchange rates, and financial conditions.

Contribution

It introduces a novel identification strategy to separate pure US monetary policy shocks from the Fed's information effects, clarifying their distinct international spillover impacts.

Findings

Pure US monetary tightening causes recession and currency depreciation.

Fed information-driven tightening leads to economic expansion and currency appreciation.

Ignoring the Fed's information effects biases the perceived impact of US interest rate changes.

Abstract

This paper quantifies the international spillovers of US interest rates by explicitly controlling for the "Fed Information Effect". I use multiple identification strategies that identify two components of monetary policy surprises around FOMC meetings: a pure US monetary policy shock component and a "Fed Information Effect" component. On the one hand, a US tightening caused by a pure US monetary policy component leads to an economic recession, an exchange rate depreciation and tighter financial conditions. On the other hand, a tightening of US monetary policy caused by the "Fed Information Effect" leads to an economic expansion, an exchange rate appreciation and looser financial conditions. Ignoring the "Fed Information Effect" biases the impact of US interest rates and may explain recent atypical findings which suggest an expansionary impact of US monetary policy shocks on the rest of the world.