Liberty Street Economics

Sushant Acharya, Ozge Akinci, Silvia Miranda-Agrippino, and Paolo A. Pesenti

In the literature on monetary policy spillovers considered in the two previous posts, countries that would otherwise operate independently are connected to one another through bilateral trade relationships, and it is assumed that there are no frictions in currency, financial, and asset markets. But what if we introduce a number of real-world complexities, such as a dominant global currency and tight linkages across international capital markets? Given these additional factors, is it still possible to draw generalized conclusions about international policy spillovers—and can we still think of them as a fundamentally bilateral phenomenon? In our third and final post, we explore these questions by focusing on two key elements in the determination of international policy spillovers: the U.S. dollar and the Global Financial Cycle. 

Sushant Acharya, Ozge Akinci, Silvia Miranda-Agrippino, and Paolo A. Pesenti

As covered in the first post in this series, the international transmission of monetary policy shocks features positive output spillovers when the so-called expenditure-switching effect is sufficiently large. Departing from textbook analysis, this post zooms in on the implications of differences across market participants with respect to their consumption preferences and ability to insure against income risk. The key message is that these features can, at least theoretically, change the impact of spillovers from positive to negative as well as alter their overall magnitude. These aspects of the international transmission mechanism are especially relevant when addressing spillovers from advanced to emerging economies.

Sushant Acharya, Ozge Akinci, Silvia Miranda-Agrippino, and Paolo A. Pesenti

Understanding cross-border interdependencies and inspecting the international transmission mechanism of policy shocks is the raison d’être of open-economy macroeconomics as an intellectual discipline. The relevance for the policy debate is pervasive: over and over in the history of the international monetary system national policymakers have pointed at — and voiced concerns about—the effects of policy actions undertaken in foreign countries on the outlook and financial conditions in their own domestic economies. The most recent example involves the spillovers of tighter monetary policies aimed at addressing the inflationary spikes associated with the COVID-19 pandemic. In this three-part series, we provide a non-technical introduction to the multifaceted literature on global spillovers, building in particular on our own research. This post introduces the subject and offers an overview of the classic transmission channels.