Foreign effects of higher U.S. interest rates

By Matteo Iacoviello, Gaston Navarro. Journal of International Money and Finance, 2019

213 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6208638f750eb4fb904204343aae41cc2da86afd

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Citations in the corpus

U.S. Monetary Policy and International Risk Spillovers (2019, background): “42See Dedola et al. (2017), Iacoviello and Navarro (2019), Miranda-Agrippino and Rey (2019), Bruning and Ivashina (2019) that show the effect of the U.S. monetary policy and GFC on global asset prices, cross-border flows and global banks leverage.”