Global Implications of Multi-dimensional US Monetary Policy Normalization

"This paper assesses global spillovers from US monetary policy simultaneously accounting for unconventional measures and central bank information effects as well as non-linearities. Findings novel to the literature are: (i) not accounting for central bank information effects produces counterintuitive spillover estimates; (ii) forward guidance and asset purchase shocks spill over to the rest of the world, while conventional monetary policy shocks are less important; (iii) Fed forward guidance induces policy trade-offs that underlie ‘fear-of-floating’ in emerging market economies and are amplified by recipient-economy vulnerabilities; (iv) emerging market economies are more responsive to Delphic shocks, as their currencies are more sensitive to ’risk-on/off’ effects, and their movements activate the Bruno and Shin (2015) risk-taking channel; (v) spillovers from US monetary policy tightenings are small when they occur during business cycle expansions. Our findings suggest that if the post-COVID US monetary policy normalization is communicated well it may entail only limited adverse spillovers to the world economy overall.".

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