Abstract
This study investigates the spillover effects of the U.S. monetary policy to monetary policy in inflation-targeting (IT) countries. We used the PVAR model of a panel consisting of 80 countries, with different income levels, from January 1990 to December 2019. The main finding is that the level of economic development matters for the transmission of U.S. monetary policy shocks. The shocks are transmitted to high-income countries, whereas the results for other countries are either inconclusive (middle-income countries) or not available (low-income countries). For high-income countries, following the interest rates of major global financial centers can be a way to reduce volatility and uncertainty. Unlike less developed countries, which need to adopt stricter monetary policies and have a greater need for the interest rate to act on domestic conditions in order to convince economic agents of meeting the inflation target.
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Data availability
The data that supports the findings of this study are available from the corresponding author upon request. The data used in this research can also be found in International Financial Statistics (https://data.imf.org/?sk=4c514d48-b6ba-49ed-8ab9-52b0c1a0179b&sid=1390030341854) and Cboe Global Markets (https://www.cboe.com/).
Notes
The main financial centers include the United States, Euro Area, Japan and United Kingdom.
In this paper, we utilize the Treasury Bill’s interest rate.
The correlation coefficients presented were calculated by the authors.
This classification is used to encompass countries with a floating exchange rate regime, but some of them will probably not have a pure floating exchange rate regime; Obstfeld (2015) also used this classification.
Informally, among the Latin American countries, Chile was the first to adopt the IT, in 1990 (Fonseca et al. 2016).
See Table A4 in the Online Appendix.
Edwards (2015).
For further details, see Table A6 in the Online Appendix.
Chile, Colombia, Dominican Republic, Guatemala, Indonesia, India, Korea, Norway, Paraguay, Peru and Uruguay. Japan and the United Kingdom are also countries that adopt IT, but they were removed from the calculation, given that they are large financial centers, and therefore were used in the calculation of the average of the main financial centers worldwide.
The global monetary shock (average interest rate of the main financial centers: USA, Japan, Euro Area and UK) was also calculated—see results in Figs. 1a and 2a, in the appendix. In order to analyze the response to the global monetary shock, the group of countries with fixed exchange rates totaled twenty countries.
US interest rate increase.
There were not enough data to estimate the results for different low-income groups and countries.
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This work was supported by the Minas Gerais State Research Support Foundation (FAPEMIG) and the National Council for Scientific and Technological Development (CNPQ).
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de Sá Farias, E., de Mattos, L.B. & Ferreira, D.M. Spillover effects: Does the inflation targeting system matter?. SN Bus Econ 4, 66 (2024). https://doi.org/10.1007/s43546-024-00662-1
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DOI: https://doi.org/10.1007/s43546-024-00662-1