The Transmission of International Monetary Policy Shocks to Firms’ Expectations

Motivated by the dominant role of the US dollar, we explore how monetary policy (MP) shocks in the United States can affect a small open economy through the expectation channel. We combine data from a panel survey of firms' expectations in Uruguay with granular information about firms' debt position. We show that a contractionary MP shock in the United States reduces firms' inflation and cost expectations in Uruguay. This result contrasts with the effect of this shock on the Uruguayan economy. We study mechanisms related to how firms and managers experience in different monetary policy regimes can explain the results and discuss their implications.