Global Spillovers from Fed Hikes and a Strong Dollar: The Risk Channel

We study the international transmission of US monetary policy shocks and a strong US dollar. We show that monetary tightening is linked to a higher risk premium, only in emerging markets, measured by deviations from uncovered interest parity. An appreciation of the US dollar, on the other hand, does not lead to higher risk premia anywhere, even though countries' currencies depreciate vis-a-vis the dollar. Our interpretation is that monetary policy shocks are a better proxy for global financial conditions than the exchange rate movements that may be capturing more fundamental shocks.