Spillovers of US interest rates: Monetary policy & information effects

Abstract

This paper quantifies the international spillovers of U.S. interest rates by accounting for the “Fed Response to News” channel. Using the identification strategy of Bauer and Swanson (2023a), we decompose monetary policy surprises into two components: a pure U.S. monetary policy shock and a “Fed Response to News” component around FOMC meetings. I find that a U.S. monetary tightening driven by pure policy shocks causes a global recessions, exchange rate depreciation, and tighter financial conditions. In contrast, a tightening driven by the “Fed Response to News” channel leads to an economic expansion, exchange rate appreciation, and looser financial conditions. Ignoring the “Fed Response to News” channel biases estimates, explaining recent atypical findings of expansionary impacts. By isolating these components, I reconcile traditional and recent views of monetary policy spillovers. Results are robust across advanced and emerging economies, alternative methods, and identification strategies.