International monetary policy spillovers: Evidence from a time-varying parameter vector autoregression

Abstract

This study examines the transmission of international monetary policy spillovers across developed economies based on a Bayesian time-varying parameter vector autoregressive (TVP-VAR) connectedness methodology. The analysis is based on daily shadow short rates over the period of January 2, 1995 to December 20, 2018. The empirical findings suggest that the magnitude of international monetary policy spillovers behaves heterogeneously over time, with unprecedented heights reached during the Great Recession of 2009, suggesting potential gains from unconventional monetary policy coordination. In addition, the results indicate that the dominant transmitters of international monetary policy spillovers are the Euro Area and the US, while Japan and the UK are the dominant receivers of spillovers. Our results are robust to alternative experimentations in terms of estimation and prior choices used to estimate the TVP-VAR.