INTERNATIONAL SPILLOVER OF US MONETARY POLICY THROUGH THE RISK-TAKING CHANNEL: EVIDENCE FROM SINGAPORE

Abstract

This paper studies the international spillover of US monetary policy into Singapore through the risk-taking channel. Using an information-robust monetary policy shock in a smooth local projections (SLP) framework, I find that US monetary policy tightening leads to an increase in global risk aversion. This leads to deleveraging of American and European global banks, which decreases cross-border credit inflows into Singapore from the US. However, this is more than offset by a surge in safe haven flows from other riskier countries, resulting in a net increase in total inflows. The increase in risk aversion also leads to deviations from the uncovered interest parity (UIP) condition, which depreciates the Singapore dollar (SGD). The increase in credit inflows and depreciation of SGD together result in expansionary effects of US monetary policy tightening in Singapore.