Global Forces and Monetary Policy Effectiveness
In this paper, we quantify the changes in the relationship between international forces and many key US macroeconomic variables over the 1984-2005 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.
Prepared for the NBER conference on International Dimensions of Monetary Policy in Girona (Spain), June 2007. We thank conference participants, in particular Olivier Blanchard, Jordi Galí, Mark Gertler, Larry Meyer, Benoît Mojon, Lucrezia Reichlin, Chris Sims, and Michael Woodford for very valuable discussions and comments, and Guilherme Martins for excellent research assistance. We are also grateful to the National Science Foundation for financial support (SES-0518770). The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.