Financial Globalisation, Monetary Policy Spillovers and Macro-Modelling: Tales from 1001 Shocks

64 Pages Posted: 28 Jun 2017

See all articles by Georgios Georgiadis

Georgios Georgiadis

European Central Bank (ECB)

Martina Jancokova

Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: June 23, 2017

Abstract

Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we find: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful financial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to financial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these findings applies to monetary policy shock estimates obtained from VAR and other statistical models, financial market expectations and the narrative approach.

Keywords: Financial globalisation, spillovers, monetary policy shocks, New Keynesian DSGE models

JEL Classification: F42, E52, C50

Suggested Citation

Georgiadis, Georgios and Jancokova, Martina, Financial Globalisation, Monetary Policy Spillovers and Macro-Modelling: Tales from 1001 Shocks (June 23, 2017). ECB Working Paper No. 2082. Available at SSRN: https://ssrn.com/abstract=2993183

Georgios Georgiadis (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Martina Jancokova

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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