The International Monetary Transmission Mechanism

US monetary shocks triggering a domestic recession lead to a collapse in imports and exert strong spillover effects, diminishing export demand for the rest of the world and contributing to a global economic downturn. Traditional tools like FX interventions and capital controls prove ineffective in managing these shocks. We demonstrate the effectiveness of such interventions in scenarios involving pure financial shocks. With flexible export prices and the absence of dollar debt, a flexible exchange rate partially insulates the economy against global monetary shocks.