Sign-Dependent Spillovers of Global Monetary Policy

TL;DR

This paper investigates how the effects of Federal Reserve and ECB monetary policy shocks differ depending on whether they are expansionary or contractionary, revealing significant asymmetries in international spillovers across multiple economies.

Contribution

It introduces a high-frequency identification method to analyze sign-dependent spillovers, uncovering asymmetries masked by linear models and demonstrating robustness across various samples and methodologies.

Findings

Contractionary shocks worsen financial conditions and trade abroad.

Expansionary shocks have minimal measurable effects.

Asymmetries are consistent across different identification strategies.

Abstract

This paper examines the sign-dependent international spillovers of Federal Reserve and European Central Bank monetary policy shocks. Using a consistent high-frequency identification of pure monetary policy shocks across 44 advanced and non-advanced economies and the methodology of Caravello and Martinez-Bruera, 2024, we document strong asymmetries in international transmission. Linear specifications mask these effects: contractionary shocks generate large and significant deteriorations in financial conditions, economic activity, and international trade abroad, while expansionary shocks yield little to no measurable improvement. Our results are robust across samples, identification strategies, and the framework proposed by Ben Zeev et al., 2023.