Abstract
This thesis investigates the US monetary policy international spillovers through the banking channel. Ever since the 2007-2008 financial crisis, the role played by banks in propagating financial and monetary shocks worldwide has been investigated. This led to a remarkable growth in papers providing evidence of the importance of the banking sector and its pro-cyclical nature. A strand of the literature even questioned the Trilemma, a long-established theory that states that monetary policy independence is achieved only under a flexible exchange rate regime and full capital mobility. In Chapter 1, I investigate this topic using a Global VAR methodology that enables to capture countries’ macro-financial linkages. The chapter’s main results outline the reduction in cross-border banking flows in both advanced and emerging economies following a US contractionary monetary policy shock. Additionally, domestic credit is negatively affected only in countries where global banks mostly operate. However, the results still indicate that these countries have retained their monetary policy independence despite being exposed to US monetary policy shocks, which validates the Trilemma. I also estimate the model using a different modelling strategy that captures the relatively greater importance of the US economy. Firstly, I show that most of the linkages between domestic and foreign variables are attributed to the US’s variables. Secondly, I show that domestic central banks follow their own monetary policy rule by reacting to domestic deviations in inflation, in line with the baseline results. Chapter 2 examines the spillovers of monetary policy in a two-bloc open economy dynamic stochastic general equilibrium model with financial frictions. I find that the banking sector exacerbates the recession triggered by a contractionary domestic monetary policy shock. Additionally, the shock propagates to the foreign economy through the banking channel, that outweighs the short-lived positive impact from the trade channel. These results stress the importance of banks as a powerful channel of transmission of monetary policy shocks.