Transmission of monetary shocks in a globally connected world

The global financial crises displayed the degree of globalization and the large risks of contagion across national borders in times of crises. Moreover, policy measures of different central banks after the outbreak of the crisis showed how important central bank policy and coordination of central banks can be in calming international financial markets. In this project, we will analyze empirically the degree of international transmission of monetary policy shocks. Doing so contributes to two different debates. First, we will take an international perspective to improve identification of the effects of monetary policy shocks, a point emphasized in the recent literature. Second, a better identification of effects is necessary to discuss normative consequences: are central banks capable of reaching their political goals? Should central banks – in addition to national policy goals – take international effects of their policy measures into account? These questions are of particular importance when we consider options of reducing international contagion of financial crises and the potential to limit economic and social costs of worldwide economic crises.

In the most recent literature, effects of monetary policy shocks are identified in vector autoregressive models (VAR) using changes of forward rates around central bank announcements. At the core of this identification strategy lies the assumption that forward rates embody all expectations about a change of central bank policy until maturity. If rates change in a short window around central bank announcements, this change has to come from a change in expectation, i.e., an unexpected monetary policy shock. However, the current literature largely ignores international transmissions, which potentially may lead biased estimates of the effects of these shocks. Therefore, we will use a Panel VAR, combining several macroeconomic variables for multiple countries in a single model, allowing unbiased estimates of shock transmissions. We estimate our model for the US, the Eurozone and Great Britain, and identify monetary policy shocks of the three central banks using above described instruments.

Participating Institutes

German Institute fpr Economic Research (DIW)

Halle Institute for Economic Research (IWH)


Juniorprofessor Dr. Gregor von Schweinitz (IWH)

Annika Schnücker (former DIW)

Project term

05/2017 - 05/2018