What Goes around Comes around: How Large Are Spillbacks from US Monetary Policy?

Abstract

Spillovers from US monetary policy entail spillbacks to the domestic economy. Applying counterfactual analyses in a Bayesian proxy structural vector-autoregressive model we find that spillbacks account for a non-trivial share of the slowdown in domestic real activity following a contractionary US monetary policy shock. Spillbacks materialise as a monetary policy tightening depresses foreign sales and valuations of US firms so that Tobin’s /cash flow and stock market wealth effects impinge on investment and consumption. Net trade does not contribute to spillbacks because US monetary policy affects exports and imports similarly. Geographically, spillbacks materialise through advanced rather than emerging market economies.