International Transmission of US Monetary Policy Shocks into Open Financial Markets: High-frequency SVAR Approach
34 Pages Posted: 23 Aug 2016 Last revised: 4 Sep 2019
Date Written: August 2, 2019
This paper investigates the domestic and international transmission of monetary policy shocks into financial markets in five advanced open economies with inflation targeting– Australia, Canada, New Zealand, South Korea, and United Kingdom. This paper is new in identifying the impact of foreign (United States) and domestic monetary policy shocks on multiple financial asset prices in a unified structural VAR framework, using a novel set of high-frequency external instruments. Empirical results are summarized as follows. First, foreign exchange rates in the open economies respond to monetary shocks flexibly following domestic and foreign monetary shocks, showing little evidence on the puzzles raised by earlier studies (e.g., delayed overshooting). Second, despite the fluctuations in foreign exchange rates, the US monetary shocks strongly propagate into other types of open financial markets as well. Third, although the results provide evidence on the significant domestic transmission of monetary shocks into financial markets, US shocks appear to exhibit greater and more persistent influences over domestic asset prices than domestic shocks. Finally, counterfactual experiments reveal that the international transmission of US monetary policy shocks are operated through several channels, including via US asset prices and via foreign exchange rates.
Keywords: monetary policy transmission, external instrument identification, structural VAR model, local projection method, open economy
JEL Classification: E44, E52
Suggested Citation: Suggested Citation