Business and Economics Journal, Volume 2011: BEJ-26 1 International Monetary Transmission, a Factor-Augmented Vector Autoregressive (FAVAR) Approach: The Cases of Mexico and Brazil

This paper studies whether and how U.S. monetary shocks are transmitted to emerging economies utilizing as samples Mexico and Brazil. A Factor-Augmented Vector Autoregressive (FAVAR) methodology is employed to take advantage of the wide array of variables that can be included in this model to provide a more accurate picture of the transmission process. The results suggest that differences exist in the transmission of foreign monetary shocks. This implies that no generalizations can be made even for countries of equal economic size and in the same geographic region. When international transmission does exist, as it is in the case of Mexico, it induces large responses in several macroeconomic variables. Interest rate is the main channel of transmission, with some impact on the trade channel. Although little transmission exists in the case of Brazil, it appears that this country slightly benefits from U.S. contractional monetary shocks. In the Brazilian case, the channel of transmission appears to be interest rates