Interpreting spillovers: the ECB, Fed interest rate hikes, and the persistence of dollar dominance

This paper examines how the European Central Bank (ECB) interprets U.S. monetary spillovers and the implications for the persistence of dollar dominance. Focusing on problem definition and agenda-setting, we ask whether ECB officials converge on a coherent diagnosis of the vulnerabilities these spillovers create. We trace how competing interpretations lead to different problem definitions. Emphasising trade and exchange rate channels reflects a traditional Mundell–Fleming view of monetary interdependence, where spillovers appear as routine open-economy disturbances and attention centers on short-term interest-rate calibration. Emphasising financial channels instead aligns with a growing literature, most prominently Hélène Rey’s work on the Global Financial Cycle, which highlights Europe’s structural dependence on dollar-centered finance. Drawing on the Federal Reserve’s aggressive tightening of 2022–24, we analyze ECB speeches, parliamentary hearings, and financial press coverage. We find that the ECB’s technocratic core recognises financial channels as the main source of vulnerability – yet this view is contested within the institution and largely absent in public debates, where short-term imported inflation and euro depreciation concerns dominate. As a result, the ECB fails to articulate a coherent problem definition. Sidelining the financial channel obscures the costs of spillovers and may blunt the urgency of reforms challenging dollar hegemony.