Global Forces and Monetary Policy Effectiveness

Abstract

In this paper, we quantify the changes in the relationship between international forces and many key US macroeconomic variables over the period, and analyze changes in the monetary policy transmission mechanism. We do so by estimating a Factor-Augmented VAR on a large set of US and international data series. We find that the role of international factors in explaining US variables has been changing over the 1984-2005 period. However, while some US series have become more correlated with global factors, there is little evidence suggesting that these factors have become systematically more important. We don't find strong evidence of a change in the transmission mechanism of monetary policy due to global forces. Taking our point estimates literally, global forces do not seem to have played an important role in the US monetary transmission mechanism between 1984 and 1999. In addition, since the year 2000, the initial response of the US economy following a monetary policy shock ---the first 6 to 8 quarters ---is essentially the same as the one that has been observed in the 1984-1999 period. However, point estimates suggest that the growing importance of global forces might have contributed to reducing some of the persistence in the responses, two or more years after the shocks. Overall, we conclude that if global forces have had an effect on the monetary transmission mechanism, this is a recent phenomenon.

Globalization, Domestic Inflation and Global Output Gaps: Evidence from the Euro Area*

“…In addition, Dees et al (2007) find that foreign consumer price inflation has a statistically significant impact on domestic inflation in some economies. Furthermore, Boivin and Giannoni (2008) find evidence of correlation between US inflation and various sets of foreign common factors 5…”

“…This does not mean, of course, that policy‐makers should not pay attention to globalization. A recent study by Boivin and Giannoni (2008) examines the effect of globalization on the transmission mechanism of monetary policy shocks to the US economy in recent years. They find little evidence of changes in the initial response of inflation compared with previous decades, but they do find a decline in the response's persistence after the two‐year horizon.…”

“… 5 However, Boivin and Giannoni (2008) note that the degree of correlation and its development over time vary depending on the definition of prices considered and that only in the case of the GDP deflator, the foreign factors contain significant information above and beyond that contained in domestic common factors. …”

International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada

“…We adopt a two‐country FAVAR (Boivin and Giannoni, , Charnavoki and Dolado, ) framework for our analysis, which allows us to explicitly take into account real‐financial linkages between the United States and Canada. We are interested both in quantifying the size of the spillover effect to Canada, and in assessing the importance of the different transmission channels through which QE can spill over to another country.…”

Global Business Cycles: Convergence or Decoupling?*

“…8 8 The difficulty of such identification is illustrated by Boivin and Giannoni's (2010) use of a factor augmented vector autoregression to capture the impact of globalization on the U.S. monetary transmission mechanism. Reichlin (2010) notes that the interpretation of their estimated VARs and related Granger causality tests is confounded by the relationships and feedbacks among global and national forces that jointly determine national variables, making the transmission mechanism difficult to interpret. …”