WHAT ARE THE INTERNATIONAL CHANNELS THROUGH WHICH A US POLICY SHOCK IS TRANSMITTED TO THE WORLD ECONOMIES? EVIDENCE FROM A TIME VARYING FAVAR.
Anastasios Evgenidis
University of Patras
Costas Siriopoulos
Zayed University
Abstract
In this paper, we examine the international transmission of US monetary policy shocks across euro area and Asian countries by using a FAVAR model. We first examine all possible channels through which a policy shock is transmitted to each country. In general the transmission of the shock hides considerable heterogeneity across the countries. We find that the trade balance is important in explaining GDP spillover effects in the case of Singapore. Wealth effects along with the world interest rate channel explain the negative propagation of the US shock to the GDP of Hong Kong, the Philippines and Singapore. The exchange rate channel can explain the positive spillover effects on GDP in Korea and Japan. For the euro area, an endogenous response of the euro area monetary authority is observed. The wealth effect through the role of effective exchange rates seems adequate to describe the transmission of the shock to European countries. For Germany and Italy the decline in lending and spending reveal the importance of the balance sheet channel in the shock transmission. Second, we investigate to what extent the transmission mechanism has changed over time. For the 2007 financial crisis, our results indicate that the majority of the countries in both regions witness an increase in the size of the shock to real activity, inflation and credit variables in the post crisis period.
JEL classification: C38, E52, F41
Keywords: Monetary Policy, International Transmission Mechanism, FAVAR, Bayesian Statistics, Time Varying Parameters
Acknowledgements: The authors would like to thank Heather Gibson for insightful comments and suggestions as well as the participants at the seminar series of the Bank of Greece for helpful comments on an earlier version of the paper. Anastasios Evgenidis also acknowledges financial support from the Bank of Greece for carrying out this research. The views expressed do not necessarily reflect those of the Bank of Greece.
Correspondence:
Anastasios Evgenidis
University of Patras
Department of Business Administration
Email: anevg@upatras.gr