The Transmission of US Monetary Policy Normalization to Emerging Markets

Kolver Hernandez

Chapter 2 in International Spillovers of Monetary Policy, 2017, pp 15-30 from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: In this chapter, I analyze the potential macroeconomic effects of the normalization of US monetary policy for emerging market economies (EMEs), in particular for Mexico. I build on the work of Hernandez and Leblebicioglu (2016) by adding monetary elements to their two-country DSGE model that endogenizes multiple transmission channels for the transmission of international shocks. Among those channels are the exchange rate, international bank lending, international trade and monetary policy rates. Based on a Bayesian estimation of the deep parameters of the model, I simulate scenarios that yield an equilibrium in which us monetary policy rate would increase in the last two quarters of 2015. The underlying conditions that promote the normalization of monetary policy in USA imply favorable growth of around 2.4% in GDP and an average increase of 25 basis points in us policy rate. For Mexico, those conditions carry positive international spillovers that result in an average GDP growth of 2.8%. The increa e in us rate calls for a response in Mexico’s policy rate in more than one to one, i.e., it calls for an aggressive response. Mexico’s policy rate hike contains the depreciation of the exchange rate and stabilizes inflation.

Keywords: emerging market business cycles; transmission of foreign shocks; estimated two-country model; international transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E32 F41 (search for similar items in EconPapers)
Date: 2017
Note: Joint Research Program XX Meeting of the Central Bank Researchers Network
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