Nonlinear transmission of U.S. monetary policy shocks to international financial markets

Abstract

Using local projection and event studies, this paper investigates the nonlinear effects of U.S. monetary policy shocks on financial-asset prices in 10 advanced economies from 1990 to 2014. The international asset prices show evidence of the asymmetric or state-dependent propagation of U.S. monetary shocks. Moreover, the results indicate that the nature of the nonlinearity in the propagation of the shocks differs across two asset classes, bond yields, and equity prices. Contractionary U.S. monetary policy shocks are quite influential in sovereign bond markets, while their impacts are largely insignificant in stock markets; the opposite is true for expansionary monetary policy shocks. These results are typical across open economies and suggest that U.S. monetary announcements and the subsequent reactions of international risk premiums may play a critical role in international shock propagation.