1. GLOBAL FINANCIAL TRANSMISSION OF MONETARY POLICY SHOCKS Comments by Sven W. Arndt The Lowe Institute of Political Economy Claremont McKenna College May 26, 2006

2. Preliminaries Objectives –U.S. monetary policy and home and foreign asset prices –channels of transmission –determinants of response

3. Method –series of estimating equations for asset returns –key right-hand side variables drawn from literature on domestic financial markets Literature on cross-border linkages

4. General Comments Study addresses an important issue and is competently executed More than typical test of statistical relationships But might benefit from ascertaining statistical relationships Pays attention to economic underpinnings But underlying economic structure is largely implicit

5. Channels of Transmission 1. Response of U.S. asset prices, especially short-term interest rates 2. Through foreign asset prices Missing: direct effect of policy shock

6. Framework Conditions Openness: trade, capital account, financial markets Exchange-rate regime Real and financial integration Macroeconomic conditions

7. Issues Sequential vs. joint determination: “through” or “together with” U.S. and foreign interest rates Rational foreign agents react directly to U.S. monetary policy surprises Role of expectations

8. Arbitrage Conditions Traditional approach: interest arbitrage –r = e’ – e + r* –burden of adjustment is a function of exchange-rate regime Apply to equity returns

9. Specification Issues Identification problems Country types: overlapping? –Fixed –Floating –Dependent –Independent

10. Specification Issues Determinants –Openness vs. integration –Macro vs. micro considerations –Economy-wide vs. sector level –Business cycles –Relative inflation rates