International Spillovers of Conventional Versus Unconventional US Monetary Policy

ABSTRACT This paper investigates the international spillovers of conventional and unconventional US monetary policy for a diverse set of 44 countries. A two‐stage empirical approach is considered, first using country‐specific structural vector autoregressions to isolate US monetary policy shocks and estimate their dynamic effects on other economies. In the second stage, cross‐country regressions are used to identify the structural characteristics that drive the heterogeneity in these spillovers. The results suggest a distinct dichotomy in the transmission mechanisms: conventional US monetary policy appears to spill over primarily through trade‐related channels in this framework, with its impact shaped by a country's participation in global value chains. In contrast, unconventional policy is transmitted mainly through financial channels, with a country's degree of financial openness being the most critical determinant of its vulnerability. While conventional US monetary policy tightening typically causes currencies to appreciate, unconventional tightening leads to widespread depreciation. These findings imply that the specific tool used by the Federal Reserve may influence the relative dominance of international transmission channels and that financial openness significantly reduces monetary policy autonomy in the face of unconventional US monetary policy shocks.