Foreign Effects of Higher U.S. Interest Rates

41 Pages Posted: 6 Jun 2018 Last revised: 21 Feb 2019

See all articles by Matteo Iacoviello

Matteo Iacoviello

Board of Governors of the Federal Reserve System

Gaston Navarro

Board of Governors of the Federal Reserve System

Date Written: 2018-05

Abstract

This paper analyzes the spillovers of higher U.S. interest rates on economic activity in a large panel of 50 advanced and emerging economies. We allow the response of GDP in each country to vary according to its exchange rate regime, trade openness, and a vulnerability index that includes current account, foreign reserves, inflation, and external debt. We document large heterogeneity in the response of advanced and emerging economies to U.S. interest rate surprises. In response to a U.S. monetary tightening, GDP in foreign economies drops about as much as it does in the United States, with a larger decline in emerging economies than in advanced economies. In advanced economies, trade openness with the United States and the exchange rate regime account for a large portion of the contraction in activity. In emerging economies, the responses do not depend on the exchange rate regime or trade openness, but are larger when vulnerability is high.

Keywords: U.S. Monetary Policy, Foreign Spillovers, Local Projection, Macroeconomic Transmission, Panel Data

JEL Classification: F4, E5, C3

Suggested Citation

Iacoviello, Matteo and Navarro, Gaston, Foreign Effects of Higher U.S. Interest Rates (2018-05). FRB International Finance Discussion Paper No. 1227. Available at SSRN: https://ssrn.com/abstract=3187708 or http://dx.doi.org/10.17016/IFDP.2018.1227

Matteo Iacoviello (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gaston Navarro

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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