Together or Apart? Monetary Policy Divergences in the G4

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We evaluate monetary policy divergence in the G4. A Taylor rule is extended that admits a global element and also allows for unconventional monetary policy to be reflected in a shadow policy rate. We propose a policy divergence index based on observed, fitted, or shadow policy rates but which interprets the stance of monetary policy as being dictated by the real interest rate. In spite of flexible exchange rates, each economy’s monetary policy is significantly impacted by a global element, pre- and post-crisis. Our divergence index also suggests more divergence in the stance of monetary policy than if nominal policy rates alone are compared, whether observed or shadow rates are used. Nevertheless, we conclude that US monetary policy’s impact among other systemically important economies has increased since the global financial crisis, although divergences do persist.