Openness and the Strength of Monetary Transmission : International Evidence

This study explores cross-country variations in the effects of a monetary policy shock on output using the sample of 48 developed and developing countries. The structural vector autoregression model is used to estimate monetary policy effects for each country separately. Based on the estimated impulse responses we construct a measure of the short-run monetary policy effect on output which is used as the dependent variable in a cross-country regression. Previous literature exploring cross-regional and cross-country differences in the effects of monetary policy has mainly concentrated on the impact of financial and industrial structure. This study extends the analysis by investigating the importance of openness for the strength of monetary transmission. The results of our cross-country regression analysis provide novel empirical evidence on the importance of the exchange rate channel and interdependence between national economies for monetary policy transmission. In particular, our results suggest that the effects of monetary policy shock on output are significantly influenced by: exchange rate regime; trade openness; correlation with the US and for European countries with German economy, and development of the banking sector