How Does U.S. Monetary Policy Affect Emerging Market Economies?

Ozge Akinci and Albert Queraltó
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Albert Queraltó: https://www.federalreserve.gov/econres/albert-queralto.htm

No 20210517, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: The question of how U.S. monetary policy affects foreign economies has received renewed interest in recent years. The bulk of the empirical evidence points to sizable effects, especially on emerging market economies (EMEs). A key theme in the literature is that these spillovers operate largely through financial channels—that is, the effects of a U.S. policy tightening manifest themselves abroad via declines in international risky asset prices, tighter financial conditions, and capital outflows. This so-called Global Financial Cycle has been shown to affect EMEs more forcefully than advanced economies. It is because higher U.S. policy rates have a disproportionately larger impact on rates in EMEs. In our recent research, we develop a model with cross-border financial linkages that provides theoretical foundations for these empirical findings. In this Liberty Street Economics post, we use the model to illustrate the spillovers from a tightening of U.S. monetary policy on credit spreads and on the uncovered interest rate parity (UIP) premium in EMEs with dollar-denominated debt.

Keywords: financial frictions; U.S. monetary policy spillovers; currency premium; financial conditions (search for similar items in EconPapers)
JEL-codes: E52 F00 (search for similar items in EconPapers)
Date: 2021-05-17
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
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