| Abstract: |
Much research has been devoted to studying the international spillover effects
of US monetary policy. However, a lot of the focus has been on the recent
unconventional monetary policies undertaken by the Federal Reserve. Combining
high frequency financial market data with a time-varying parameter approach we
show that US monetary policy decisions have had significant effects on the
Indian stock markets well before the use of unconventional policy tools and
that these effects have gotten stronger over time. In addition to the
conventional channel of surprise changes in the policy rate, we find that US
monetary shocks are also transmitted through an uncertainty channel, which is
especially important for announcements about large scale asset purchases
(quantitative easing). Using firm level stock prices, we also show that the
higher sensitivity of the aggregate response is uniform across the stock
market and is not driven by the increased exposure of any specific industry to
US monetary policy. Instead, our results suggest that it is driven by the
portfolio decisions of foreign institutional investors and the exchange rate
becoming more sensitive to US monetary policy. |