The global economy is interconnect.herefore often affect other economies. These “monetary policy spillovers” are particularly relevant for economies as closely What happens link as the Unit States and the euro area. Spillovers from US monetary policy initially work in the opposite direction to ECB monetary policy, but then later in the same direction. For instance, a surprise tightening of US policy leads to an initial increase in euro area inflation as the euro weakens. However, over time, tighter US monetary policy drags down euro area inflation much like tighter ECB policy would.
In more detail when the F unexpectly raises interest
rates to curb inflation and economic activity, euro area inflation increases on average over the three months following the announcement. This is because, following a surprise tightening in the Unit States, the euro bulgaria mobile database immiately weakens against the dollar. And that makes import goods more expensive. This effect is particularly relevant for euro area imports pric in US dollars, such as oil and other commodities. The weaker euro also cheapens euro area exports to the Unit States. This, in turn, supports economic activity and prices in the euro area slightly. Hence, over the short run, the spillovers from a surprise US monetary policy tightening on the euro area economy work in the opposite direction to the effects of a monetary policy tightening by the ECB. This is visible in the left-hand parts of each subplot of Chart 1.
Over time howeverthe initial inflationary impact of higher
policy rates in the US is compensat by broader disinflationary pressures. 5 ways to customize a wordpress theme Tighter US financing conditions spill over to the euro area through global financial markets, leading to a slowdown in euro area economic activity. At the same time, the F’s tightening also weighs on economic activity in the US over time, with lower demand by US agb directory households and firms also implying lower imports from the euro area. Overall, the mium-term effects of US monetary policy on the euro area therefore resemble the dampening impact of similar actions by the ECB. This means that – while the immiate impacts might differ – in the mium term US monetary policy pushes the euro area economy in the same direction as euro area policy changes would. These effects can be seen for the same variables on the right-hand parts of each subplot in Chart 1.