The importance of the dollar in the global financial system and in international trade amplifies the spillover effects of US monetary policy on the rest of the world. By employing a recently proposed identification strategy and a dataset that covers 30 other economies, this paper studies how a US monetary policy shock propagates internationally.
A US monetary policy tightening causes a contraction in prices and industrial production in both emerging and advanced economies. The shock mainly transmits to economic activity through financial channels, whereas the transmission to inflation is mediated by a contraction in commodity prices. Even in a flexible exchange rate regime, the contractionary effects are not fully neutralized due to the increase in risk premia.
