US Spillovers of US Monetary Policy: Information effects & Financial Flows

This paper presents evidence of an informational effect in changes of the federal funds rate around FOMC announcements by exploiting exchange rate variations for a panel of emerging economies. For several FOMC announcements dates, emerging market economies' exchange rate strengthened relative to the US dollar, in contrast to what the standard theory predicts. These results are in line with the information effect, which denote the Federal Reserve's disclosure of information about the state of the economy. Using Jarocinski \& Karadi 2020's identification scheme relying on sign restrictions and high-frequency surprises of multiple financial instruments, I show how different US monetary policy shocks imply different spillovers on emerging markets financial flows and macroeconomic performance. I emphasize the contrast in dynamics of financial flows and equity indexes and how different exchange rate regimes shape aggregate fluctuations. Using a structural DSGE model and IRFs matching techniques I argue that ignoring information shocks bias the inference over key frictions for small open economy models.