U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data

U.S.MonetaryPolicyShockSpillovers:Evidencefrom Firm-LevelData ElifArbatli-Saxegaard,MelihFirat,DavideFurceri,andJeanneVerrier WP/22/191 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2022 SEP ©2022InternationalMonetaryFundWP/22/191 IMFWorkingPaper AsiaandPacificDepartment U.S.MonetaryPolicyShockSpillovers:EvidencefromFirm-LevelData1 PreparedbyElifArbatli-Saxegaard,MelihFirat,DavideFurceri,andJeanneVerrier AuthorizedfordistributionbyJayPeiris IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. September2022 Abstract WeexaminethreemainchannelsthroughwhichU.S.monetarypolicyshocksaffectfirminvestmentinforeigncountries:(1)thebalancesheetchannel;(2)thefinancialchanneloftheexchangerate;and(3)thetradechannel.Forthispurpose,weusequarterlyfirm-leveldatafor63advancedeconomies(AEs)andemergingmarketanddevelopingeconomies(EMDEs)over1996-2016.Ourresultssuggestanimportantandindependentroleforallthreekeychannels.U.S.monetarypolicyshockshavelargereffectsoninvestmentforfirmsthataremoreleveraged(balancesheetchannel),forfirmsthathaveahighershareofdebtinforeigncurrency(financialchanneloftheexchangerate),andforfirmsthatoperateinsectorswithhigherexportdependence(tradechannel).Back-of-the-envelopecalculationssuggestthatthebalancesheetchannelisthemostimportantchanneloftransmissionofU.S.monetarypolicyshocksonaggregatefirminvestment. JELClassificationNumbers: F4;E5;D2;C3. Keywords: U.S.monetarypolicyshocks;internationalspillovers;investment;firmheterogeneity. Authors’E-MailAddresses: EArbatli@imf.org;MFirat@imf.org;DFurceri@imf.org;JVerrier@imf.org 1Forhelpfulcommentsandsuggestions,theauthorswouldliketothankHelgeBerger,OlivierJeanne,SebnemKalemli-Ozcan,MinsukKim,UgoPanizza,CanSever,CédricTilleandJonathanWright,aswellasseminarparticipantsatthe2022FIWResearchConference,2022SouthwesternFinanceAssociationmeetings,InternationalMonetaryFundandJohnsHopkinsUniversity. WORKINGPAPERS U.S.MonetaryPolicyShockSpillovers:EvidencefromFirm-LevelData PreparedbyElifArbatli-Saxegaard,MelihFirat,DavideFurceri,andJeanneVerrier. TableofContents 1.Introduction3 2.DataandEmpiricalFramework6 2.1.Data6 2.2.U.S.MonetaryPolicyShocks9 2.3.EmpiricalStrategy9 3.Results11 3.1.AverageEffects11 3.2.SpilloverChannelsandFirmCharacteristics12 3.3.RobustnessChecks14 3.4.Back-of-the-EnvelopeCalculations15 3.5.InteractionsBetweenChannels17 3.6.Extensions18 4.Conclusions18 References20 Figures25 Tables33 Annex34 Annex1:Mundell-FlemingFramework34 Annex2:Data38 Annex3:UnconditionalAnalysis45 Annex4:ConditionalAnalysis54 1.Introduction Monetarypolicyinadvancedeconomies,andinparticularintheUnitedStates,hasbeenidentifiedasakeysourceofinternationalspillovers(Rey2013;Rey2016;Kalemli-Ozcan2019;Miranda-AgrippinoandRey2020).Itis,therefore,notsurprisingthatthenewmonetarypolicytighteningcycleintheUnitedStatesisseenasasignificantriskfortheglobaleconomicrecovery(IMF2021).Spilloverseffectswill,however,dependonmanyfactors—includingthedomesticpolicyresponse—andoperatethroughmultiplechannels.AshighlightedinextensionsofthestandardMundell-Flemingframework(Gourinchas2018;Kalemli-Özcan2019),thereareseveralfinancialandtradechannelsthroughwhichU.S.monetarypolicycanaffectothercountries.2Threekeychannelsstandout.Afirstfinancialchannelisoftencalledthe“balancesheetchannel,”whereby U.S.monetarypolicytighteningleadstotighterfinancialconditionsforfirmsinforeigncountries,withanegativeimpactoninvestment,inparticularforfirmsthataremoreleveragedandmoredependentonexternalfinance.Thesecondfinancialchannel(the“financialchanneloftheexchangerate”)operatesthroughtheeffectoftheresultingdepreciationoftheforeigncurrencyvis-à-vistheU.S.dollaronfirms’balancesheets,ifforexamplefirmshavelargeforeign-currencyliabilities.WhilethesetwofinancialchannelspredictanegativeeffectofU.S.monetarypolicytighteningonforeigncountries,thethirdkeychannel,the“tradechannel,”hasaprioriambiguouseffects.Ontheonehand,tighterU.S.monetarypolicycanlowerdemandforimportsintheUnitedStates(“expenditurereducingeffect”).Ontheotherhand,itcanincreasedemandforimportsthroughitsimpactonexchangeratedepreciationinforeigncountries(“expenditureswitchingeffect”). Whatisthestrengthofthesechannels?Thispapertriestoanswerthisquestion.AlthoughthereisavoluminousliteraturelookingatU.S.monetarypolicyspillovers,empiricalevidenceontheimportanceofthesetransmissionchannelsismuchmorelimitedandoftenperformedusingcountry-leveldata.Inthispaper,wecontributetothisliteraturebyquantifyingandcomparingtherelativestrengthofthesechannels,foralargesetof63advancedeconomies(AEs)andemergingmarketanddevelopingeconomies(EMDEs)overa20-yearperiod,usingacomprehensivequarterlyfirm-leveldataset. 2SeeAnnex1for