Output Spillovers from U.S. Monetary Policy: The Role of International Trade and Financial Linkages
To understand how macroeconomic shocks in one country can have spillover effects that affect output in other countries, the authors of this paper estimate the effects of U.S. monetary policy changes on real GDP per capita in 44 advanced and developing countries during the period ranging from 1995 through 2017. Furthermore, they examine the cross-country heterogeneity of these spillover effects, with a focus on an individual country’s openness to foreign trade and its exposure to the global financial system. With additional data on bilateral trade and financial flows, the authors proceed to estimate a range of spatial models, shedding new light on international trade and financial networks and on the role that these individual linkages play in the propagation of monetary shocks across countries. This framework enables the authors to estimate the network amplification effect, decomposing a country’s spillover effect into a direct effect stemming from a U.S. monetary policy shock and a chain of indirect effects due to the output responses in other countries propagating through the network of global trade and financial linkages.