Spillover effects: Does the inflation targeting system matter?

This study investigates the spillover effects of the U.S. monetary policy to monetary policy in inflation-targeting (IT) countries. We used the PVAR model of a panel consisting of 80 countries, with different income levels, from January 1990 to December 2019. The main finding is that the level of economic development matters for the transmission of U.S. monetary policy shocks. The shocks are transmitted to high-income countries, whereas the results for other countries are either inconclusive (middle-income countries) or not available (low-income countries). For high-income countries, following the interest rates of major global financial centers can be a way to reduce volatility and uncertainty. Unlike less developed countries, which need to adopt stricter monetary policies and have a greater need for the interest rate to act on domestic conditions in order to convince economic agents of meeting the inflation target.