Working Paper
The Dollar Channel of Monetary Policy Transmission
Abstract: This paper documents a new dollar channel that transmits monetary policy across borders. Exploiting unique features of the syndicated loan market for identification, we show that changes in the euro-dollar exchange rate around ECB monetary policy announcements that are orthogonal to simultaneous changes in euro-area interest rates and stock prices affect U.S. leveraged loan spreads. Specifically, in response to dollar appreciation, investors require higher compensation for risk, and borrowing costs for U.S. firms increase. These findings imply a causal link between the U.S. dollar and investors’ risk appetite.
JEL Classification: F15; G15; G21; G23;
https://doi.org/10.17016/FEDS.2025.046
Access Documents
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2025046pap.pdf
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2025-07-01
Number: 2025-046