Monetary Policy Shocks and Macroeconomic Spillovers Across Global Economies: Evidence from a GVAR Framework

Abstract

Monetary policy shocks can have a direct impact on domestic economic conditions, and also have indirect effects on the world through financial market linkages, trade linkages, and exchange rate adjustments. In this paper, the focus is on analysing the potential transmission of monetary policy disturbances between the global economies within the framework of a Global Vector Autoregressive (GVAR) model. The updated GVAR database released by the International Monetary Fund (IMF) provided the data for macroeconomic variables for 33 economies for the period 1979Q2-2023Q3. The analytical framework deals with the key variables; real GDP, inflation, interest rates, exchange rates, equity prices and linkages in international trade trade to explore the interactions of macroeconomic variables between countries. Descriptive findings are provided for all countries and time periods, which is suitable for international spillover analysis with the database. The econometric method proposed uses country-specific models, impulse response functions and forecast error variance decomposition to examine the dynamics of monetary transmission. The cross-country differences in policy response are believed to be related to the differences in the economic structure and level of financial integration and trade exposure, respectively, of the countries. While quantitative spillover estimates depend on the ability to estimate the model completely, the study lays groundwork for assessing international monetary interdependence. The study reveals the implications for macroeconomic stabilization, monetary policy coordination and future studies with varying time lags of international spillovers.