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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Do fundamentals explain the international impact of U.S. interest rates? evidence at the firm level
John Ammer
Clara Vega
Jon Wongswan
Abstract

This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign firm-level equity prices. We find that U.S. monetary policy has important influences on foreign equity prices on average, but with considerable variation across firms. We have found that this differing response reflects a range of factors, including the extent of a foreign firm's exposure to U.S. demand, its dependence on external financing, the behavior of interest rates in its home country, and its sensitivity to portfolio adjustment by U.S. investors. The cross-firm variation in the response is correlated with the firm's CAPM beta; but it cannot fully explain this variation. More generally, we see these results as shedding some additional light on the nature and extent of the monetary and financial linkages between the United States and the rest of the world. In particular, since we are able to explain differences across foreign firms' responses through established theories of monetary transmission, our results are consistent with the surprisingly large average foreign response to U.S. rates reflecting fundamentals, rather than an across-the-board behavioral over-reaction.


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John Ammer & Clara Vega & Jon Wongswan, Do fundamentals explain the international impact of U.S. interest rates? evidence at the firm level, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 952, 2008.
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Keywords: Monetary policy - United States ; Interest rates ; International finance
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