The international spillovers of US monetary policy uncertainty: Is it a dilemma or trilemma for monetary policy?

Abstract

This study investigates the global spillover effects of US monetary policy uncertainty (MPU) and evaluates whether countries face the traditional ‘trilemma’ or Rey's ‘dilemma’ in preserving monetary independence. While existing research has extensively analyzed the worldwide transmission of US monetary policy shocks, the distinct role of MPU in driving global financial cycles remains underexplored. Using a Global Vector Autoregression (GVAR) model covering 36 economies accounting for 90 % of global GDP, this study identifies that US MPU shocks significantly reduce economic activity, share prices, and interest rates across the globe. Counterfactual analyses reveal that these direct impacts of MPU shocks are more substantial than their indirect effects through interest rates or global financial cycles. Economies with stringent capital controls and robust macroprudential policies exhibit greater insulation from MPU shocks, whereas exchange rate flexibility alone is insufficient to provide protection. These findings strengthen Rey's ‘dilemma’ hypothesis over the ‘trilemma,’ underscoring the necessity of comprehensive policy frameworks to mitigate external uncertainties and enhance international economic resilience.