Spillovers of US Interest Rates: Monetary Policy & Information Effects

TL;DR

This paper analyzes how different types of US monetary policy shocks, identified through high-frequency asset movements, have distinct international spillover effects on the economy, exchange rates, and financial conditions.

Contribution

It distinguishes between pure monetary policy shocks and information disclosure shocks, revealing their different global spillover impacts using a novel identification strategy.

Findings

Pure US monetary tightening causes recession and currency depreciation.

Information-driven tightening leads to economic expansion and currency appreciation.

Ignoring information effects biases the understanding of US monetary policy impacts.

Abstract

This paper quantifies the international spillovers of US monetary policy by exploiting the high-frequency movement of multiple financial assets around FOMC announcements. I use the identification strategy introduced by Jarocinski & Karadi (2022) to identify two FOMC shocks: a pure US monetary policy and an information disclosure shock. These two FOMC shocks have intuitive and very different international spillovers. On the one hand, a US tightening caused by a pure US monetary policy shock 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 FOMC disclosing positive information about the state of the US economy leads to an economic expansion, an exchange rate appreciation and looser financial conditions. Ignoring the disclosure of information by the FOMC biases the impact of a US monetary policy tightening and may explain recent atypical findings.