CEDE Seminar - Alfredo Mendoza-Fernández

We study how central banks respond to U.S. monetary shocks. Using a newly constructed dataset covering over 9,500 monetary policy meetings across 59 economies (the MPM-dataset), we show that emerging market economy (EME) central banks systematically move in unison with the Fed, whereas advanced economy central banks do not. We present evidence that this heterogeneity arises because, in EMEs, U.S. monetary shocks are perceived as cost-push shocks, transmitted through exchange rate fluctuations that affect firms’ costs, owing to the greater prevalence of dollar debt and dollar-invoiced imports. A three-bloc open-economy New Keynesian model with dominant currency pricing and partial debt dollarization reproduces these empirical patterns, highlighting that EME responses stem from the immediate impact of Fed shocks on exchange rates and, in turn, on firms’ marginal costs.