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

U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data Elif Arbatli-Saxegaard, Melih Firat, Davide Furceri, and Jeanne Verrier WP/22/191IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2022 SEP © 2022 International Monetary Fund WP/22/191IMF Working Paper Asia and Pacific Department U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data1Prepared by Elif Arbatli-Saxegaard, Melih Firat, Davide Furceri, and Jeanne Verrier Authorized for distribution by Jay Peiris September 2022 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Abstract We examine three main channels through which U.S. monetary policy shocks affect firm investment in foreign countries: (1) the balance sheet channel; (2) the financial channel of the exchange rate; and (3) the trade channel. For this purpose, we use quarterly firm-level data for 63 advanced economies (AEs) and emerging market and developing economies (EMDEs) over 1996-2016. Our results suggest an important and independent role for all three key channels. U.S. monetary policy shocks have larger effects on investment for firms that are more leveraged (balance sheet channel), for firms that have a higher share of debt in foreign currency (financial channel of the exchange rate), and for firms that operate in sectors with higher export dependence (trade channel). Back-of-the-envelope calculations suggest that the balance sheet channel is the most important channel of transmission of U.S. monetary policy shocks on aggregate firm investment. JEL Classification Numbers: F4; E5; D2; C3. Keywords: U.S. monetary policy shocks; international spillovers; investment; firm heterogeneity. Authors’ E-Mail Addresses: EArbatli@imf.org; MFirat@imf.org; DFurceri@imf.org; JVerrier@imf.org 1For helpful comments and suggestions, the authors would like to thank Helge Berger, Olivier Jeanne, Sebnem Kalemli-Ozcan, Minsuk Kim, Ugo Panizza, Can Sever, Cédric Tille and Jonathan Wright, as well as seminar participants at the 2022 FIW Research Conference, 2022 Southwestern Finance Association meetings, International Monetary Fund and Johns Hopkins University. WORKING PAPERS U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data Prepared by Elif Arbatli-Saxegaard, Melih Firat, Davide Furceri, and Jeanne Verrier. IMF WORKING PAPERS U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data INTERNATIONAL MONETARY FUND 2 Table of Contents 1.Introduction ........................................................................................................................3 2.Data and Empirical Framework.......................................................................................6 2.1. Data .....................................................................................................................................6 2.2. U.S. Monetary Policy Shocks .............................................................................................9 2.3. Empirical Strategy ..............................................................................................................9 3.Results ...............................................................................................................................11 3.1. Average Effects .................................................................................................................11 3.2. Spillover Channels and Firm Characteristics ....................................................................12 3.3. Robustness Checks............................................................................................................14 3.4. Back-of-the-Envelope Calculations ..................................................................................15 3.5. Interactions Between Channels .........................................................................................17 3.6. Extensions .........................................................................................................................18 4.Conclusions .......................................................................................................................18 References .....................................................................................................................................20 Figures ...........................................................................................................................................25 Tables .........................................................