Addressing Spillovers from Prolonged U.S. Monetary Policy Easing

There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise threats to stability, what countries do? Specifically, there role for macroprudential tools, capital controls or foreign exchange intervention safeguarding stability from risks arising externally? We examine the efficacy these interventions by exploring whether preemptive reactive mitigate risks. Using sample 950 bank and nonbank firms across 28 non-U.S. over past two decades, we show if policymakers are able implement policies prior an additional consecutive decline U.S. interest rates, institutions do not increase their as much they otherwise would. By contrast, it more difficult counter spillovers interventions. In practice, however, need remain cautious about timing preventative tightening, especially when face large negative shocks pandemic.