Using dollarized countries to analyze the effects of US monetary policy shocks

Identifying monetary policy shocks is difficult. Therefore, instead of trying to do this perfectly, this paper exploits a natural setting that reduces the consequences of shock misidentification. It does so by inferring from the responses of variables in dollarized countries. They import US monetary policy just as genuine US states do, but have the advantage that non-monetary US shocks are not imported perfectly. Consequently, this setting reduces the role played by any non-monetary US shocks, while leaving the effects of the true monetary shocks unaffected. Results suggest that prices fall after monetary contractions; output does not show a clear response.