The Transmission of International Monetary Policy Shocks on Firms' Expectations

RePEc Short ID: ppe705
ORCID iD: 0000-0002-3614-8715

Frache, Serafin; Lluberas, Rodrigo; Pedemonte, Mathieu; Turen, Javier

doi:10.26509/frbc-wp-202301

Working Paper

The Transmission of International Monetary Policy Shocks on Firms' Expectations

Abstract: 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.

Keywords: Firms' Expectations; Global Financial Cycle; Monetary Policy Spillovers;

JEL Classification: E31; E58; F41; D84; E71;

https://doi.org/10.26509/frbc-wp-202301