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The puzzling change in the international transmission of U.S. macroeconomic policy shocks

Ilzetzki, Ethan and Jin, Keyu ORCID: 0000-0002-0139-799X (2021) The puzzling change in the international transmission of U.S. macroeconomic policy shocks. Journal of International Economics, 130. ISSN 1464-3758

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Identification Number: 10.1016/j.jinteco.2021.103444

Abstract

We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-i...
Additional Information: © 2021 Elsevier B.V.
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
Date Deposited: 28 Jan 2021 11:12
Last Modified: 20 Sep 2021 04:11
URI: http://eprints.lse.ac.uk/id/eprint/108566

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