Cross-Country Differences in the Effects of Monetary Policy Shocks on Output and Prices and Their Determinants

On the basis of a sample of 19 countries and using sign-restricted VAR, second-stage regression, and small open economy DSGE model, this research investigates whether there exist differences in the effects of monetary shocks on output and prices between countries, and, if any, which country characteristics incur such differences. The VAR analysis shows that monetary policy shocks of the same magnitude generate differences in terms of the effects on output and prices between countries. The maximal responses of industrial production indexes to a 25-basis-point shock policy rate cut range from a decrease to an over 3% increase with an average of about 1–2% increase. Those of consumer price indexes range from 0.3% to around a 2% increase, with an average of 0.9% increase. The results from regression analysis imply that various country characteristics engender disparities in the responses to monetary policy shocks. The magnitude of the output responses to monetary policy shocks is larger in countries with a monetary policy framework closer to inflation-targeting, a more flexible exchange rate regime, more rapid population aging, and a more rigid labor market, and is smaller in countries with a more independent central bank and a more developed financial market. The size of the price responses is larger in countries with higher trade openness and a more rigid labor market, and smaller in countries with a monetary policy framework closer to inflation-targeting and more rapid population aging. Furthermore, the results from the small open economy DSGE model, which we use to check whether a monetary policy framework, trade openness, and labor market rigidity can make a difference in the effects of monetary policy shocks, largely correspond to those of the regression analysis