Luca Dedola and Livio Stracca, European Central Bank, and Giulia Rivolta, University of Brescia

If the Fed Sneezes, Who Catches a Cold？

Dedola, Stracca, and Rivolta look at the global effects of U.S. monetary policy shocks using a two stage approach. They first estimate a large Bayesian VAR and identify U.S. monetary policy shocks using sign restrictions, and then analyse their effects on a number of real and financial variables in countries other than the U.S.. The researchers find that a surprise U.S. monetary tightening leads to a dollar appreciation vis-á-vis most countries in their sample. Moreover, in most countries industrial production and real GDP fall, unemployment rises, and inflation declines. The researchers find significant heterogeneity across countries, and emerging economies tend to experience larger effects. At the same time, they do not find any systematic relation between the country responses and the most likely relevant country characteristics, such as income level, exchange rate regime, financial openness, trade openness vs. the U.S., and dollar exposure.