Global Impact of the U.S Economy: An Analysis of the Channels of Interconnection and their Transmission Effects

The United States economy has the most significant global impact due to its size and productivity. This paper explores the effects of interconnection with the U.S and how real GDP and stock market returns of other economies are affected by the U.S. The transmission mechanisms that are highlighted are trade, exchange rate dynamic, and foreign direct investment. This paper looks to determine which link with the U.S delivers the strongest effects on other economies, and if these effects are magnified in a recession period in the U.S. The focus of this paper is real GDP and stock market returns of 170 countries from 1970-2014. Other literature has focused on either transmission mechanisms or contagion effects. This paper attempts to explore both, with the intention to shed light on policy implications that can reduce contagion effects. The results indicate that real GDP of countries that peg to the U.S are most affected by changes to U.S GDP. The stock market return of countries with net FDI outflow are most affected by U.S stock returns. For years after 1990, transmission effects on GDP and stock returns were stronger than 1970-1990, because economies were more interconnected after 1991. When factoring in recession for GDP, transmission effects are not significantly magnified. The GDP of countries with a net FDI inflow is the most affected in a recession. The results on stock market returns in a recession indicate that U.S returns significantly affect other countries returns, and countries that are net importers are heavily affected.