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/10.21033/wp-2025-06
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Bibliographic Information
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series
Publication Date: 2025-03-24
Number: WP 2025-06