The Fed and the Rest: International Spillover Effects of U.S Monetary Policy Announcements


This research investigates, at first, whether the monetary policy (conventional or unconventional) shocks in the United States have significant effects on the financial asset price (equity prices, bond yields, and exchange rates) in the rest of the world, then evaluate to what extent the response of foreign asset prices to US monetary surprises vary across advanced and non-advanced countries and how these reactions changed in conventional (1996-2008) and unconventional monetary policy times (2008 - 2017). Overall, we find that the international spill overs from US monetary policy shocks are substantial; moreover, it shows that in many countries the effects of spill overs on the markets are higher than the domestic impact in the US itself. Moreover, the study compares the domestic reactions to the international reactions and concluded that the magnitudes of the reactions of the international financial asset price to US monetary policy surprises are different relative to the domestic reactions. For instance, the responses of international fixed income market prices are lower than the domestic responses while the foreign stock market is more responsive. Therefore, it is not easy to say whether the Fed has more effect on the international market or the other way around but it depends on the markets. It further examines whether there are differences between the response of international financial assets before and after quantitative easing to the monetary policy surprise in the US and found that the response of international exchange rates to US monetary shocks increase about eight times after the quantitative easing. Similarly, we documents that advance and non-advanced countries respond to US monetary policy differently. For example, the response of advanced countries exchange rates to the US monetary policy surprises increased about 7 times while non-advanced countries vulnerability increased 9 times after the quantitative easing. These results led to the interpretation that the US dollar has increased its domination of the world currency markets after quantitative easing which caused a four times increase in the amount of dollar (the Fed balance) in international markets.

University of Nottingham, School of Economics.