Monetary Spillover and Policy Responses: How Do Central Banks React to the Fed and Why?

This paper studies how the Federal Reserve's monetary stance affects the policy-making of other central banks, i.e., policy rates and balance sheet operations. I decompose monetary shocks into an interest rate shock and a risk premium shock using high-frequency monetary identification. I find the responses of policy rates are largely homogeneous across emerging and advanced economies. For balance sheet operations, however, a positive interest rate shock leads other central banks to shrink their asset holdings mostly by reducing claims on depository institutions and government agencies, while a positive risk premium shock has an immediate and positive effect on central banks' total asset. The transmissions of both shocks are weak before 2008, and becomes important afterwards. Notably, emerging economies cope with international spillovers primarily with foreign reserve operations, and advanced economies with domestic monetary policies. Surprisingly, emerging economies employ unconventional instruments in response to a risk premium shock while advanced economies do not. A simple model of international financial intermediaries is introduced to provide a rationale for some important empirical findings.