US Sneezing and Australian Colds: Economic Spillovers in Both Conventional and Unconventional Monetary Policy Times

Abstract

We provide new evidence of international spillover of US monetary policy considering three transmission channels in an integrated framework. In this framework, we use a comprehensive dynamic time and frequency domain analysis and identify the main transmission channel (spillover) of US monetary policy to be through interest rates followed by asset prices (mainly through the consumer discretionary sector), and the exchange rate channels. We find that the most significant spillover was at the onset of the COVID-19 pandemic, with other peak transmissions being during the European sovereign debt crisis (ESDC) and the global financial crisis (GFC). As a novel contribution, we show that these spillovers can be used as external instruments to remove the price puzzle for Australia. We further show that US monetary policy could undermine Australia's monetary policy. Our findings suggest international interest rate-channel as the dominant transmission channel for cross-country monetary policy spillovers.

Keywords: monetary policy spillovers, contagion, US, Australia, sectoral equities

JEL Classification: E31, E44, E52, E58, G10