Sign-Dependent Spillovers of Global Monetary Policy
Santiago Camara
TL;DR
The paper investigates sign-dependent international spillovers of monetary policy shocks from the Federal Reserve and the ECB across 44 economies from 1999 to 2023 using high-frequency identification to isolate pure policy shocks. It adopts a sign-dependent local projection framework, estimating impulse responses as a function of the shock sign and its absolute value to capture asymmetries between tightening and easing. The main finding is that contractionary shocks generate large, persistent deteriorations in global financial conditions, real activity, and international trade, while expansionary shocks yield limited or non-existent improvements; linear models substantially understate these effects. The results are robust across identifications, samples, and specifications, though a notable puzzle is that ECB easings can coincide with endogenous U.S. tightening and global downturns, suggesting cross-border policy interactions and global financial dominance shape transmission. These insights imply that accounting for sign dependence is essential for accurately measuring and mitigating the international consequences of major central banks’ policy actions.
Abstract
This paper examines the sign-dependent international spillovers of Federal Reserve and European Central Bank monetary policy shocks. Using a consistent high-frequency identification of pure monetary policy shocks across 44 advanced and non-advanced economies and the methodology of Caravello and Martinez-Bruera, 2024, we document strong asymmetries in international transmission. Linear specifications mask these effects: contractionary shocks generate large and significant deteriorations in financial conditions, economic activity, and international trade abroad, while expansionary shocks yield little to no measurable improvement. Our results are robust across samples, identification strategies, and the framework proposed by Ben Zeev et al., 2023.