Monetary Policy Spillovers into Small Open Economies: The United States vs. The Euro Area

This paper evaluates the monetary policy spillovers on peripheral countries from a change in the policy rate of the euro area and the United States in the context of the Mundellian trilemma. There are two contributions of this paper to existing literature. The first is the exploration of the euro area as a source of monetary policy spillovers on a set of 99 peripheral economies. The second is expanding the model to account for countries that have pegged their currency to one that is not the Center Economy’s. Empirical findings of the paper are twofold. First, the euro area is a viable Center Economy; it has the ability to influence the policy rate of countries whose currencies are not pegged to the euro. Second, the trilemma hypothesis is generally supported by the data; countries who fixed their currency to the Center Economy’s currency and do not have capital controls follow a change in the Center Economy’s policy rate. Peripheral countries with capital controls have additional insulation from a monetary policy spillover