Monetary Policy Spillovers Through Invoicing Currencies

United States monetary policy affects macro-financial outcomes globally. I introduce heterogeneity in invoicing currencies into an open economy New Keynesian model that also allows for differences in country size and household preferences. Within the model, cross-sectional variation in U.S. monetary policy spillover effects is fully captured by heterogeneity in countries' shares of dollar invoiced trade. Moreover, central banks of countries in which a larger share of exports are invoiced in dollars face a worse output-inflation trade-off, i.e., a steeper Phillips Curve. Using high frequency measures of monetary policy shocks, I find support for the model's predictions. Countries' shares of dollar invoiced trade explain cross-sectional heterogeneity in spillovers from U.S. monetary policy shocks onto foreign exchange rates, interest rates and industrial production. Constructing a new data set of monetary policy shocks emanating from the European Central Bank, the Bank of Japan and the Bank of England, I show currency invoicing explains variation in monetary policy spillovers from these other central banks as well. After controlling for currency invoicing in trade, the magnitude of U.S. monetary policy spillovers are not significantly different from those of other central banks.