GLOBAL FINANCIAL TRANSMISSION OF

MONETARY POLICY SHOCKSComments bySven W. Arndt

The Lowe Institute of Political EconomyClaremont McKenna College

May 26, 2006

Preliminaries

• Objectives– U.S. monetary policy and home and foreign

asset prices– channels of transmission– determinants of response

• 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

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

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

Framework Conditions

• Openness: trade, capital account, financial markets

• Exchange-rate regime

• Real and financial integration

• Macroeconomic conditions

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

Arbitrage Conditions

• Traditional approach: interest arbitrage– r = e’ – e + r*– burden of adjustment is a function of

exchange-rate regime

Apply to equity returns

Specification Issues

• Identification problems

• Country types: overlapping?– Fixed– Floating– Dependent– Independent

Specification Issues

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