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Working Paper

The Transmission of International Monetary Policy Shocks on Firms' Expectations

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Motivated by the dominant role of the US dollar, we explore how monetary policy (MP) shocks in the US can affect a small open economy through the expectation channel. We combine data from a panel survey of firms' expectations in Uruguay with granular information about firms' debt position and total imports on a monthly basis. We show that a contractionary MP shock in the US reduces firms' inflation and cost expectations in Uruguay. This result contrasts with the inflationary effect of this shock on the Uruguayan economy, suggesting uncertainty about the policy regime. We discuss the issues and challenges of this expectation channel.
Topics
Monetary policy
International economics
01.04.2023ISSN 2573-7953 WP 23-01DOI 10.26509/frbc-wp-202301
Keywords Firms' Expectations, Global Financial Cycle, Monetary Policy Spillovers
JEL Classification Codes E31, E58, F41, D84, E71

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Frache, Serafin, Rodrigo Lluberas, Mathieu Pedemonte, and Javier Turen. 2023. “The Transmission of International Monetary Policy Shocks on Firms' Expectations.” Federal Reserve Bank of Cleveland, Working Paper No. 23-01. https://doi.org/10.26509/frbc-wp-202301