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 972, Staff Reports from Federal Reserve Bank of New York

Abstract: We use a macroeconomic model to explore how policy drivers and country vulnerabilities matter for the transmission of U.S. monetary policy shifts to emerging markets. Our model features imperfections in domestic and international financial markets and imperfectly anchored inflation expectations. We show that higher U.S. interest rates arising from stronger U.S. demand generate modestly positive spillovers to activity in emerging markets with stronger fundamentals, but can be adverse for vulnerable countries. In contrast, U.S. monetary tightenings driven by a more-hawkish policy stance cause a substantial slowdown in all emerging markets. Our model captures the challenging policy tradeoffs that emerging market central banks face, and we show that these tradeoffs are more favorable when inflation expectations are well anchored. We use our model to estimate the effects on emerging markets of the 2022-23 U.S. monetary tightening, and compare the model-predicted effects against actual real and financial outcomes in those countries.

Keywords: spillovers; monetary policy; emerging markets (search for similar items in EconPapers)
JEL-codes: E32 E44 F41 (search for similar items in EconPapers)
Pages: 48
Date: 2021-06-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac, nep-mon and nep-opm
Note: Revised September 2024.
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Working Paper: U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter (2021)
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