U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data

U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data

Author: Ms. Elif C Arbatli Saxegaard

Publisher: International Monetary Fund

Published: 2022-09-16

Total Pages: 69

ISBN-13:

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We examine three main channels through which U.S. monetary policy shocks affect firm investment in foreign countries: (1) the balance sheet channel; (2) the financial channel of the exchange rate; and (3) the trade channel. For this purpose, we use quarterly firm-level data for 63 advanced economies (AEs) and emerging market and developing economies (EMDEs) over 1996-2016. Our results suggest an important and independent role for all three key channels. U.S. monetary policy shocks have larger effects on investment for firms that are more leveraged (balance sheet channel), for firms that have a higher share of debt in foreign currency (financial channel of the exchange rate), and for firms that operate in sectors with higher export dependence (trade channel). Back-of-the-envelope calculations suggest that the balance sheet channel is the most important channel of transmission of U.S. monetary policy shocks on aggregate firm investment.


Book Synopsis U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data by : Ms. Elif C Arbatli Saxegaard

Download or read book U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data written by Ms. Elif C Arbatli Saxegaard and published by International Monetary Fund. This book was released on 2022-09-16 with total page 69 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine three main channels through which U.S. monetary policy shocks affect firm investment in foreign countries: (1) the balance sheet channel; (2) the financial channel of the exchange rate; and (3) the trade channel. For this purpose, we use quarterly firm-level data for 63 advanced economies (AEs) and emerging market and developing economies (EMDEs) over 1996-2016. Our results suggest an important and independent role for all three key channels. U.S. monetary policy shocks have larger effects on investment for firms that are more leveraged (balance sheet channel), for firms that have a higher share of debt in foreign currency (financial channel of the exchange rate), and for firms that operate in sectors with higher export dependence (trade channel). Back-of-the-envelope calculations suggest that the balance sheet channel is the most important channel of transmission of U.S. monetary policy shocks on aggregate firm investment.

Addressing Spillovers from Prolonged U.S. Monetary Policy Easing

Addressing Spillovers from Prolonged U.S. Monetary Policy Easing

Author: Stephen Cecchetti

Publisher: International Monetary Fund

Published: 2021-07-09

Total Pages: 37

ISBN-13: 1513584499

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There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise of threats to financial stability, what can countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preemptive or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions. In practice, however, policymakers need to remain cautious about the timing of preventative tightening, especially when their economies face large negative shocks such as a pandemic.


Book Synopsis Addressing Spillovers from Prolonged U.S. Monetary Policy Easing by : Stephen Cecchetti

Download or read book Addressing Spillovers from Prolonged U.S. Monetary Policy Easing written by Stephen Cecchetti and published by International Monetary Fund. This book was released on 2021-07-09 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise of threats to financial stability, what can countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preemptive or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions. In practice, however, policymakers need to remain cautious about the timing of preventative tightening, especially when their economies face large negative shocks such as a pandemic.

Market Power and Monetary Policy Transmission

Market Power and Monetary Policy Transmission

Author: Mr. Romain A Duval

Publisher: International Monetary Fund

Published: 2021-07-09

Total Pages: 56

ISBN-13: 1513588001

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We show that firms’ market power dampens the response of their output to monetary policy shocks, using firm-level data for the United States and a large cross-country firm-level dataset for 14 advanced economies. The estimated impact of a firm’s markup on its response to a monetary policy shock is large enough to materially affect monetary policy transmission. We also find some evidence that the role of markup in monetary policy transmission, while independent from other channels, is greater for firms whose characteristics — notably size and age — are likely to be associated with greater financial constraints. We rationalize these findings through a simple partial equilibrium model in which borrowing constraints amplify disproportionately low-markup firms’ responses to changes in interest rates.


Book Synopsis Market Power and Monetary Policy Transmission by : Mr. Romain A Duval

Download or read book Market Power and Monetary Policy Transmission written by Mr. Romain A Duval and published by International Monetary Fund. This book was released on 2021-07-09 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that firms’ market power dampens the response of their output to monetary policy shocks, using firm-level data for the United States and a large cross-country firm-level dataset for 14 advanced economies. The estimated impact of a firm’s markup on its response to a monetary policy shock is large enough to materially affect monetary policy transmission. We also find some evidence that the role of markup in monetary policy transmission, while independent from other channels, is greater for firms whose characteristics — notably size and age — are likely to be associated with greater financial constraints. We rationalize these findings through a simple partial equilibrium model in which borrowing constraints amplify disproportionately low-markup firms’ responses to changes in interest rates.

Dominant Currency Paradigm: A New Model for Small Open Economies

Dominant Currency Paradigm: A New Model for Small Open Economies

Author: Camila Casas

Publisher: International Monetary Fund

Published: 2017-11-22

Total Pages: 62

ISBN-13: 1484330609

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Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.


Book Synopsis Dominant Currency Paradigm: A New Model for Small Open Economies by : Camila Casas

Download or read book Dominant Currency Paradigm: A New Model for Small Open Economies written by Camila Casas and published by International Monetary Fund. This book was released on 2017-11-22 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data

Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data

Author: Margherita Bottero

Publisher: International Monetary Fund

Published: 2019-02-28

Total Pages: 59

ISBN-13: 1498300855

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We study negative interest rate policy (NIRP) exploiting ECB's NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply-- -and hence the real economy---through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.


Book Synopsis Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data by : Margherita Bottero

Download or read book Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data written by Margherita Bottero and published by International Monetary Fund. This book was released on 2019-02-28 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study negative interest rate policy (NIRP) exploiting ECB's NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply-- -and hence the real economy---through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.

China Spillovers: Aggregate and Firm-Level Evidence

China Spillovers: Aggregate and Firm-Level Evidence

Author: Alexander Copestake

Publisher: International Monetary Fund

Published: 2023-10-17

Total Pages: 57

ISBN-13:

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We estimate the impact of distinct types of slowdowns in China on countries and firms globally. First, we combine a structural vector autoregression framework with a broad-based measure of domestic economic activity in China to distinguish supply versus demand components of Chinese growth. We then use local projection models to assess the responses to such shocks of GDP growth (revenue) in other countries (firms). We find that: (i) both supply and demand slowdowns are associated with substantial declines in partner GDP and firm revenue; (ii) negative spillovers are larger in countries and firms with stronger trade links with China; and (iii) spillovers from Chinese supply shocks are stronger than spillovers from demand shocks, both at the aggregate- and firm-level.


Book Synopsis China Spillovers: Aggregate and Firm-Level Evidence by : Alexander Copestake

Download or read book China Spillovers: Aggregate and Firm-Level Evidence written by Alexander Copestake and published by International Monetary Fund. This book was released on 2023-10-17 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: We estimate the impact of distinct types of slowdowns in China on countries and firms globally. First, we combine a structural vector autoregression framework with a broad-based measure of domestic economic activity in China to distinguish supply versus demand components of Chinese growth. We then use local projection models to assess the responses to such shocks of GDP growth (revenue) in other countries (firms). We find that: (i) both supply and demand slowdowns are associated with substantial declines in partner GDP and firm revenue; (ii) negative spillovers are larger in countries and firms with stronger trade links with China; and (iii) spillovers from Chinese supply shocks are stronger than spillovers from demand shocks, both at the aggregate- and firm-level.

U.S. Monetary Policy Spillovers to Middle East and Central Asia: Shocks, Fundamentals, and Propagations

U.S. Monetary Policy Spillovers to Middle East and Central Asia: Shocks, Fundamentals, and Propagations

Author: Giovanni Ugazio

Publisher: International Monetary Fund

Published: 2024-01-19

Total Pages: 37

ISBN-13:

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We empirically examine U.S. monetary policy spillovers to the Middle East and Central Asia (ME & CA) region by decomposing U.S. interest rates changes into two orthogonal shocks: the pure monetary policy shock and the information news shock. Using a sample of 16 ME & CA countries, we find that when interest rates increase, the two shocks have opposite spillovers on the region. Tightening driven by contractionary monetary policy shocks hinders growth, while tightening driven by positive information news shocks boosts growth despite higher interest rates. Countries with weaker fundamentals face more negative spillovers from contractionary monetary policy shocks but may sometimes benefit more from positive information news shocks. Moreover, high oil prices mitigate both spillovers for oil exporters while global risk appetite amplifies both spillovers. Finally, we estimate a large degree of heterogeneity in the impact of the 2022 U.S. tightening cycle on ME & CA countries, with oil exporters with stronger fundamentals withstanding well the shock and oil importers with weaker fundamentals being hit the most.


Book Synopsis U.S. Monetary Policy Spillovers to Middle East and Central Asia: Shocks, Fundamentals, and Propagations by : Giovanni Ugazio

Download or read book U.S. Monetary Policy Spillovers to Middle East and Central Asia: Shocks, Fundamentals, and Propagations written by Giovanni Ugazio and published by International Monetary Fund. This book was released on 2024-01-19 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We empirically examine U.S. monetary policy spillovers to the Middle East and Central Asia (ME & CA) region by decomposing U.S. interest rates changes into two orthogonal shocks: the pure monetary policy shock and the information news shock. Using a sample of 16 ME & CA countries, we find that when interest rates increase, the two shocks have opposite spillovers on the region. Tightening driven by contractionary monetary policy shocks hinders growth, while tightening driven by positive information news shocks boosts growth despite higher interest rates. Countries with weaker fundamentals face more negative spillovers from contractionary monetary policy shocks but may sometimes benefit more from positive information news shocks. Moreover, high oil prices mitigate both spillovers for oil exporters while global risk appetite amplifies both spillovers. Finally, we estimate a large degree of heterogeneity in the impact of the 2022 U.S. tightening cycle on ME & CA countries, with oil exporters with stronger fundamentals withstanding well the shock and oil importers with weaker fundamentals being hit the most.

Hysteresis and Business Cycles

Hysteresis and Business Cycles

Author: Ms.Valerie Cerra

Publisher: International Monetary Fund

Published: 2020-05-29

Total Pages: 50

ISBN-13: 1513536990

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Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.


Book Synopsis Hysteresis and Business Cycles by : Ms.Valerie Cerra

Download or read book Hysteresis and Business Cycles written by Ms.Valerie Cerra and published by International Monetary Fund. This book was released on 2020-05-29 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Monitoring Demand and Supply in Asia: An Industry Level Approach

Monitoring Demand and Supply in Asia: An Industry Level Approach

Author: Chris Redl

Publisher: International Monetary Fund

Published: 2023-10-17

Total Pages: 49

ISBN-13:

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This paper provides a decomposition of GDP and its deflator into demand and supply driven components for 12 Asian countries, the US and Europe, following the forecast error-based methodology of Shapiro (2022). We extend that methodology by (1) considering a wide range of statistical forecasting models, using the optimal model for each country and (2) provide a measure idiosyncratic demand and supply movements. The latter provides, for example, a distinction between aggregate demand driven inflation and, inflation driven by large shocks in only a small number of sectors. We find that lockdowns in 2020 are explained by a mix of demand and supply shocks in Asia, but that idiosyncratic demand shocks played a significant role in some countries. Supply factors played an important role in the post-COVID recovery, primarily in 2021, with demand factors becoming more important in 2022. The mix of shocks during the sharp increase in inflation in 2021-22 differs by country, with large and advanced economies generally experiencing more supply shocks (China, Australia, Korea), while emerging markets saw significant demand pressures pushing up prices (Indonesia, Malaysia, Philippines, Vietnam, Thailand). We illustrate the usefulness of the industry level shocks in two applications. Firstly, we consider whether industry supply shocks have created demand-like movements in aggregate prices and quantities, so-called Keynesian supply shocks. We find evidence for this mechanism in a minority of countries in our Asia sample, as well for Europe and the USA, but that these results are driven by the COVID-19 event. Secondly, we use the granularity of the industry shocks to construct country-level GDP shocks, driven by idiosyncratic movements at the industry level, to study cross country growth spillovers for the three large economic units in our sample: China, Europe and the US.


Book Synopsis Monitoring Demand and Supply in Asia: An Industry Level Approach by : Chris Redl

Download or read book Monitoring Demand and Supply in Asia: An Industry Level Approach written by Chris Redl and published by International Monetary Fund. This book was released on 2023-10-17 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a decomposition of GDP and its deflator into demand and supply driven components for 12 Asian countries, the US and Europe, following the forecast error-based methodology of Shapiro (2022). We extend that methodology by (1) considering a wide range of statistical forecasting models, using the optimal model for each country and (2) provide a measure idiosyncratic demand and supply movements. The latter provides, for example, a distinction between aggregate demand driven inflation and, inflation driven by large shocks in only a small number of sectors. We find that lockdowns in 2020 are explained by a mix of demand and supply shocks in Asia, but that idiosyncratic demand shocks played a significant role in some countries. Supply factors played an important role in the post-COVID recovery, primarily in 2021, with demand factors becoming more important in 2022. The mix of shocks during the sharp increase in inflation in 2021-22 differs by country, with large and advanced economies generally experiencing more supply shocks (China, Australia, Korea), while emerging markets saw significant demand pressures pushing up prices (Indonesia, Malaysia, Philippines, Vietnam, Thailand). We illustrate the usefulness of the industry level shocks in two applications. Firstly, we consider whether industry supply shocks have created demand-like movements in aggregate prices and quantities, so-called Keynesian supply shocks. We find evidence for this mechanism in a minority of countries in our Asia sample, as well for Europe and the USA, but that these results are driven by the COVID-19 event. Secondly, we use the granularity of the industry shocks to construct country-level GDP shocks, driven by idiosyncratic movements at the industry level, to study cross country growth spillovers for the three large economic units in our sample: China, Europe and the US.

International Capital Flows

International Capital Flows

Author: Martin Feldstein

Publisher: University of Chicago Press

Published: 2007-12-01

Total Pages: 500

ISBN-13: 0226241807

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Recent changes in technology, along with the opening up of many regions previously closed to investment, have led to explosive growth in the international movement of capital. Flows from foreign direct investment and debt and equity financing can bring countries substantial gains by augmenting local savings and by improving technology and incentives. Investing companies acquire market access, lower cost inputs, and opportunities for profitable introductions of production methods in the countries where they invest. But, as was underscored recently by the economic and financial crises in several Asian countries, capital flows can also bring risks. Although there is no simple explanation of the currency crisis in Asia, it is clear that fixed exchange rates and chronic deficits increased the likelihood of a breakdown. Similarly, during the 1970s, the United States and other industrial countries loaned OPEC surpluses to borrowers in Latin America. But when the U.S. Federal Reserve raised interest rates to control soaring inflation, the result was a widespread debt moratorium in Latin America as many countries throughout the region struggled to pay the high interest on their foreign loans. International Capital Flows contains recent work by eminent scholars and practitioners on the experience of capital flows to Latin America, Asia, and eastern Europe. These papers discuss the role of banks, equity markets, and foreign direct investment in international capital flows, and the risks that investors and others face with these transactions. By focusing on capital flows' productivity and determinants, and the policy issues they raise, this collection is a valuable resource for economists, policymakers, and financial market participants.


Book Synopsis International Capital Flows by : Martin Feldstein

Download or read book International Capital Flows written by Martin Feldstein and published by University of Chicago Press. This book was released on 2007-12-01 with total page 500 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent changes in technology, along with the opening up of many regions previously closed to investment, have led to explosive growth in the international movement of capital. Flows from foreign direct investment and debt and equity financing can bring countries substantial gains by augmenting local savings and by improving technology and incentives. Investing companies acquire market access, lower cost inputs, and opportunities for profitable introductions of production methods in the countries where they invest. But, as was underscored recently by the economic and financial crises in several Asian countries, capital flows can also bring risks. Although there is no simple explanation of the currency crisis in Asia, it is clear that fixed exchange rates and chronic deficits increased the likelihood of a breakdown. Similarly, during the 1970s, the United States and other industrial countries loaned OPEC surpluses to borrowers in Latin America. But when the U.S. Federal Reserve raised interest rates to control soaring inflation, the result was a widespread debt moratorium in Latin America as many countries throughout the region struggled to pay the high interest on their foreign loans. International Capital Flows contains recent work by eminent scholars and practitioners on the experience of capital flows to Latin America, Asia, and eastern Europe. These papers discuss the role of banks, equity markets, and foreign direct investment in international capital flows, and the risks that investors and others face with these transactions. By focusing on capital flows' productivity and determinants, and the policy issues they raise, this collection is a valuable resource for economists, policymakers, and financial market participants.