US Monetary Policies and Their International Spillovers

This working paper is written by Shifu Jiang (Hong Kong Monetary Authority).We estimate the domestic and international transmission of four types of US monetary policy, namely the current fed funds rate, Odyssean and Delphic forward guidance, and large-scale asset purchases. A credit channel is involved in the international transmission, driving large deviations from the uncovered interest rate parity especially over the short horizon, although this channel is not always significant in the domestic transmission. Consequently, small open economies can experience large exchange rate swings even when domestic monetary policy leans against the wind at the cost of policy independence, suggesting substantial gains of policies such as FX interventions. As governments could be constrained to intervene beyond monetary policy, we suggest that smaller dollar exposure helps reduce the international credit channel effect