The International Transmission of Monetary Shocks in a Dollarized Economy: The Case of USA and Lebanon

Abstract

We show that an American monetary shock wields an influence, though limited, over the Lebanese output in accordance with the literature advances. However, as we are waiting for a stronger transmission of U.S. short-term rates to Lebanese short-term rates, we notice that this transmission is weak in the first year. The result can be explained by the presence of pricing-to-market. After the end of the first year, we find the traditional result where the increase in the American interest rate is transmitted integrally to the Lebanese interest rate. We recognize this phenomenon as the dollarization effect.

Key words: International transmission, Monetary shock, Interest rate, Pricing-to-market, Law of one price, Purchasing power parity.
JEL: E3, E4, F3, F4.