Spillovers from US monetary policy: Role of policy drivers and cyclical conditions

Abstract

We provide new evidence on the spillover effects from US monetary policy for a large group of emerging market and advanced economies, focusing on the nature of the shocks driving movements in US interest rates. With an SVAR-IV model used to identify monetary policy, demand, and supply shocks, we find that an increase in US interest rates driven by demand shocks engenders a positive spillover to economic activity in the near-term, while an exogenous tightening of monetary policy has a large negative spillover effect, highlighting the importance of the trade channel. Furthermore, spillovers from US monetary policy shocks depend on the state of the business cycle, exerting larger effects when growth is weak outside the US. Finally, tighter US monetary policy affects the left tail of the growth distribution disproportionately: the fat left tail highlights the salience of growth at risk.