This paper studies the transmission of monetary policy shocks from the US to the euro area using a two-country structural VAR with no exogeneity assumption. The analysis reveals the following results. First, in response to an unexpected increase in the Federal funds rate, the euro immediately depreciates with respect to the dollar and then appreciates in line with the prediction of the uncovered interest parity condition. Second, there is evidence of a temporary positive spillover to euro-area output in the short run, while a negative effect emerges in the medium run. Third, the contribution of the trade balance channel to the transmission of monetary shocks is negligible. Finally, the degree of passthrough of the exchange rate changes onto euro-area consumer prices is incomplete and small in the short run, while it is close to zero in the medium run
Published in 2010 in: International Finance, v. 13, 1, pp. 55-78
