GLOBAL FINANCIAL TRANSMISSION OF MONETARY POLICY SHOCKS

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GLOBAL FINANCIAL TRANSMISSION OF MONETARY POLICY
SHOCKS

• Comments by
• Sven W. Arndt
• The Lowe Institute of Political Economy
• Claremont McKenna College
• May 26, 2006

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Preliminaries

• Objectives
• U.S. monetary policy and home and foreign asset
  prices
• channels of transmission
• determinants of response

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• Method
• series of estimating equations for asset returns
• key right-hand side variables drawn from
• literature on domestic financial markets
• Literature on cross-border linkages

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General Comments

• Study addresses an important issue and is
  competently executed
• More than typical test of statistical
  relationships
• But might benefit from ascertaining statistical
  relationships
• Pays attention to economic underpinnings
• But underlying economic structure is largely
  implicit

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Channels of Transmission

• 1. Response of U.S. asset prices, especially
  short-term interest rates
• 2. Through foreign asset prices
• Missing direct effect of policy shock

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Framework Conditions

• Openness trade, capital account, financial
  markets
• Exchange-rate regime
• Real and financial integration
• Macroeconomic conditions

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Issues

• Sequential vs. joint determination through or
  together with U.S. and foreign interest rates
• Rational foreign agents react directly to U.S.
  monetary policy surprises
• Role of expectations

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Arbitrage Conditions

• Traditional approach interest arbitrage
• r e e r
• burden of adjustment is a function of
  exchange-rate regime
• Apply to equity returns

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Specification Issues

• Identification problems
• Country types overlapping?
• Fixed
• Floating
• Dependent
• Independent

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Specification Issues

• Determinants
• Openness vs. integration
• Macro vs. micro considerations
• Economy-wide vs. sector level
• Business cycles
• Relative inflation rates

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