ECB Spillovers and Domestic Monetary Policy Effectiveness in Small Open Economies
44 Pages Posted: 15 Feb 2019 Last revised: 4 Nov 2019
Date Written: September 25, 2018
In this paper, we examine whether financial spillovers from the European Central Bank's monetary policy have consequences for the effectiveness of domestic monetary policy in three small open economies (SOEs) that are highly integrated with the European (Monetary) Union: Denmark, Norway, and Sweden. We find significant spillovers that are particularly strong for longer maturity yields. At the same time, domestic monetary policy in Norway and Sweden is effective for the shorter end of the yield curve, but much less so for the longer end of the curve. Recent work suggests that the trilemma in international economics as we used to know it, may be a dilemma: SOEs can only have effective monetary policies when the capital account is managed. Our results imply something in between: although spillovers impose challenges on domestic monetary policy effectiveness, small open economies still have some control over their yield curve.
Keywords: monetary policy effectiveness, global financial cycle, international spillovers, asset prices, small open economies
JEL Classification: E43, E44, E52, E58, G12
Suggested Citation: Suggested Citation