Macro‐financial effects of monetary policy easing

Abstract

This study examines the impact of Fed monetary policy shocks on financial stress, inflation, and output growth, considering several advanced and emerging economies. To that end, it uses shadow rates as a proxy measure of unconventional monetary policy actions and a financial stress index as an indicator of financial instability. We apply a global vector autoregressive model and present the outcome of impulse response functions and forecasts of macroeconomic and financial stress variables. Our results show that US output and inflation are positively affected in response to a domestic negative monetary policy shock, whereas financial stress is unresponsive to the same shock. This policy also has international effects, as we find significant spillovers with the US interest rate shock impacting inflation abroad. The findings of this study are useful to policymakers and investors.