International Spillovers of Tighter Monetary Policy

Dario Caldara, Francesco Ferrante, and Albert Queralto in this federal reserve research:

Central banks around the world are tightening monetary policy in response to a global surge in inflation not seen since the 1970s. This synchronization of global interest rate hikes and further increases expected by markets, illustrated in figure 1, have raised concerns about adverse international spillovers of tighter monetary policy. Some commentators have called on central banks to coordinate in their fight to tame inflation, arguing that a failure to account for spillovers could result in an unintendedly deep contraction in global economic activity.² This note builds on a large body of academic and central bank research to review the key channels through which spillovers may materialize, with a focus on the special role of the dollar in international trade and finance.

We show that central bank actions can produce spillovers to foreign economies and create tradeoffs for…