Domestic and Cross-border Impact of US Monetary Policy at the Zero Lower Bound

Abstract

This is a chapter of the domestic impact as well as cross-border spillovers of US monetary policy at the zero lower bound (ZLB) to advanced and emerging economies. We estimate the empirical relevance of the various channels of international policy transmission with a global vector error correction macroeconometric model. To address the challenge of measuring the stance of monetary policy at the ZLB, we proxy it with a shadow federal funds rate, which captures the impact of central bank balance sheet policies. We find evidence that US monetary policy was effective in stimulating the US economy. For many of the other economies, the spillovers from the quantitative easing had sizeable and persistent impacts on output growth, inflation, and equity returns. The responses in the emerging economies were rather diverse. In terms of exchange rates, a number of emerging economy currencies faced strong appreciation pressures (e.g. Malaysian ringgit and Korean won).