Monetary Policy Spillovers Through Invoicing Currencies
57 Pages Posted: 1 Mar 2018 Last revised: 1 Dec 2018
Date Written: November 14, 2018
United States monetary policy affects macro-financial outcomes globally. I introduce heterogeneity in invoicing currencies into an open economy New Keynesian model that also allows for differences in country size and household preferences. Within the model, cross sectional variation in U.S. monetary policy spillover effects is fully captured by heterogeneity in countries’ shares of dollar invoiced trade. Moreover, central banks of countries in which a larger share of exports are invoiced in dollars face a worse output-inflation trade-off, i.e., a steeper Phillips Curve. Using high frequency measures of monetary policy shocks, I find support for the model’s predictions. Countries’ shares of dollar invoiced trade explain cross-sectional heterogeneity in spillovers from U.S. monetary policy shocks onto foreign exchange rates and interest rates. Moreover, these spillover effects are not limited to the FRB and the U.S. dollar. Using high frequency measures of monetary policy shocks from the European Central Bank, I show countries with more euro invoiced trade suffer larger spillovers from the ECB. After controlling for currency invoicing in trade, the magnitude of U.S. monetary policy spillovers are not different from those of the ECB.
Keywords: Monetary Policy, Currency Invoicing, Dominant Currency, U.S. Dollar
JEL Classification: F31, F42, G12, G15
Suggested Citation: Suggested Citation