International transmission of U.S. monetary policy shocks: Evidence from VAR's

Abstract

This paper documents data-oriented, detailed evidence on the international transmission of U.S. monetary policy shocks for the flexible exchange rate period using VAR models. First, U.S. expansionary monetary policy shocks lead to booms in the non-U.S., G-6 countries. In this transmission, changes in trade balance seem to play a minor role while a decrease in the world real interest rate seems important. Second, U.S. expansionary monetary policy shocks worsen the U.S. trade balance in about a year, but subsequently it improves. Overall, the basic versions of Mundell–Flemming–Dornbusch (MFD) and the sticky price (or sticky wage) intertemporal models do not seem to be consistent with the details of the transmission mechanism, and some extended versions seem to be necessary to fit the details.