Output Spillovers from U.S. Monetary Policy: The Role of International Trade and Financial Linkages

Abstract

We estimate that U.S. monetary policy has sizable spillover effects on global economic activity.In response to a surprise increase in the federal funds rate of 25 basis points, real output in our sample of 44 countries declines on average by 0.9% after three years.We find that international trade is a more important factor than international finance in explaining these spillovers.In particular, countries with a high share of exports and imports in output have 79% larger responses than countries with a low share, whereas we do not find significant heterogeneity depending on a country's financial openness.Bilateral trade linkages appear to be quantitatively important, as the network amplification effect accounts for 45% of the total spillover effect at the peak horizon.We conclude that trade networks could be an important ingredient of theoretical models focusing on the international effects of U.S. monetary policy shocks.

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