Board of Governors of the Federal Reserve System

Figure 1. Monetary Policy Stance in Major Advanced Economies

The left panel is a line group depicting policy rate paths and projections from 2014 to 2024 for the Federal Reserve in grey, the Bank of England in green, the Bank of Canada in red, and the European Central Bank in blue. Current policy rates paths are calculated using OIS forecasts from November 15, 2022 and shown by the solid lines. February rates paths are computed using OIS forecasts from February 1, 2022 and shown by the dashed lines. Data for policy rate expectations are quarterly and end-of-period. Projections begin 2022:Q4. Policy expectations have two general peaks during this time period: the first around 2019 (peaking at -0.5, 0.8, 1.8, and 2.5 percent for the ECB, BOE, BOC, and Fed respectively) and the second, larger, peak around the first half of 2023 (peaking at 3, 4.4, 4.5, and 5 percent for the ECB, BOC, BOE, and Fed respectively). February rates paths are lower than November. The right panel line chart depicts 10-year yields from 2014 to 2022 for the United States in black, Canada in red, the United Kingdom in green, and the European Union in blue. Data for 10-year yields are monthly and end-of-period. The yields paths across all economies in the panel show a general increase from 2016 to 2019, followed by a decline until a trough in mid-2020, and a steep increase thereafter.

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Figure 2. Effects of a 100 Basis Point Monetary Tightening in the United States

Each of the four exhibits plots the response of a different variable to a 100 basis point monetary tightening by the United States. In order from left to right, then top to bottom, the variables are: U.S. GDP, foreign GDP, broad real dollar, and foreign inflation. Each exhibit displays effects at quarterly frequency, up to 16 quarters in the future, as percent deviation from the baseline. The solid blue line denotes the response of the benchmark model, and the dashed red line denotes the response of the dollar dominance model.

U.S. GDP declines and reaches its low point about four quarters after the shock before slowly rising back up. Foreign GDP experiences a similar qualitative structure though to a lesser degree. The broad real dollar spikes sharply one quarter after the shock and then slowly declines. The dollar dominance model peaks almost three times as high as the benchmark model. Foreign inflation peaks one quarter after the shock, then drops to below the baseline in the next quarter, then slowly recovers back to the baseline.

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Figure 3. Effects of a 100 Basis Point Monetary Tightening in the Foreign Economies

Two panels plot the response of U.S. GDP (left panel) and foreign GDP (right panel) to a 100 basis point monetary tightening by foreign economies. Red solid lines plot the percent deviation from baseline at each quarter (according to the dollar dominance model), up to 16 quarters into the future. U.S. GDP declines slowly over the first four quarters, with a trough at -0.2 percent, before rising even more slowly over the next twelve back to baseline. Foreign GDP drops steeply for the first four quarters, with a trough at -0.6 percent, before recovering over the next twelve to 0.2 percent below baseline.

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Figure 4. Effects of a Global Inflation Surge and More Aggressive Monetary Policy Responses

Four panels plot the response of four variables (U.S. GDP, foreign GDP, U.S. inflation, and foreign inflation) to shocks centering on a global inflation surge and more aggressive monetary policy responses. Each exhibit is a line graph at the quarterly frequency, from the present through 16 quarters ahead, and displays the percent deviation from the baseline. Each exhibit plots three lines, which show the response of the dollar dominance model to three different but related shocks. The solid blue line depicts the response to a global inflation surge, the yellow line (alternating dashes and dots) shows the response if the U.S. responded to the global inflation surge with additional monetary tightening, and the dashed red line shows the response if foreign central banks also tightened on top of the global inflation surge and U.S. tightening.

In the top left exhibit, U.S. GDP drops initially before rebounding. For the global inflation surge shock, the trough occurs 4-5 quarters ahead at 2.5 percent below baseline. The trough occurs at just under -4 percent for the additional tightening in the U.S. shock, and just above -4 percent for the additional tightening in the U.S. and foreign central banks, about 7 quarters ahead. In the top right exhibit, foreign GDP drops initially before rebounding. All three scenarios have a maximum negative deviation 5-6 quarters ahead before recovering back to baseline. For the global inflation surge shock, this occurs at -2.5 percent, for the additional tightening in the U.S. shock, this occurs at close to -3 percent, and for the additional tightening in the U.S. and foreign shock, this occurs at close to -4 percent. In the bottom left exhibit, U.S. inflation is shown to increase, then drop back towards the baseline for all scenarios. The peak occurs three quarters ahead for the global inflation surge shock, at 1 percentage point above baseline, and about two quarters ahead for two tightening scenarios, both around 0.5 percentage points (though the additional tightening in the U.S. scenario follows a deviation path that is about a tenth of a percentage point higher than the additional tightening in the U.S. and foreign scenario). In the bottom right exhibit, foreign inflation is shown to increase sharply for two quarters, then decrease back towards the baseline over the remainder of the time period for all scenarios. The additional tightening in the U.S. shock peaks the highest, at about 1.25 percentage points above baseline, while the global inflation surge and additional tightening in the U.S. and foreign shocks both peak at about 1 percentage point above baseline. However, the additional tightening scenarios decline more sharply than the global inflation surge scenario, such that the global inflation surge shock remains more elevated than the other two for the last 11 periods, eventually all recovering to about 0.4 percentage points above baseline 16 quarters ahead.

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