Research

Abstract: In this paper, I provide evidence of nonlinearities in the international transmission of US interest rate shocks to the rest of the world. Using a state-dependent local projection model, I find asymmetric spillovers over the business cycle. During recessions, a tightening in the US interest rate induces a larger decline in output, drives capital outflows, and a deterioration in financial conditions in foreign economies. On the other hand, contractionary US interest rate shocks stimulate the economy, induce capital inflows, and improve financial conditions in the rest of the world. These results are robust to different model specifications, alternative measures of US interest rate shocks and are not driven by a specific set of countries.