U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter

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

No 1321, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using a macroeconomic model, we explore how sources of shocks and vulnerabilities matter for the transmission of U.S. monetary changes to emerging market economies (EMEs). We utilize a calibrated two-country New Keynesian model with financial frictions, partly-dollarized balance sheets, and imperfectly anchored inflation expectations. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities structurally. We show that higher U.S. interest rates arising from stronger U.S. aggregate demand generate modestly positive spillovers to economic activity in EMEs with stronger fundamentals, but can be adverse for vulnerable EMEs. In contrast, U.S. monetary tightenings driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs. Our model also captures the challenging policy tradeos that EME central banks face. We show that these tradeoffs are more favorable when inflation expectations are well anchored.

Keywords: Financial frictions; U.S. monetary policy spillovers; Adaptive expectations (search for similar items in EconPapers)
JEL-codes: E32 E44 F41 (search for similar items in EconPapers)
Date: 2021-07-15
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ifn, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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Working Paper: U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1321

DOI: 10.17016/IFDP.2021.1321

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