US Monetary Policies and Their International Spillovers

We estimate the domestic and international transmission of 4 types of US monetary policy, namely the current fed funds rate, Odyssean and Delphic forward guidance, and large-scale asset purchases. A credit channel is involved in the international transmission, driving large deviations from the uncovered interest rate parity especially over the short horizon, although this channel is not always significant in the domestic transmission. The average small open economy allows exchange rate movements to partially absorb spillovers through this channel, but appears less willing to adjust the spot exchange rates under US forward guidance, possibly reflecting the "fear of floating". Both the international credit channel effect and local policy reactions show substantial heterogeneity across economies. The heterogeneity can be explained by dollar exposure but not currency mismatch, supporting the notion that the international credit channel emerges because US monetary policy affects balance sheet conditions of foreign banks that hold dollar-denominated assets and liabilities