Uncovering asymmetrical contagion effects: US monetary policy and emerging markets

Chokri Zehri, Wissem Ajili Ben Youssef and Latifa Saleh Iben Ammar
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Chokri Zehri: PSAU - Prince Sattam Bin Abdul-Aziz University
Wissem Ajili Ben Youssef: Métis Lab EM Normandie - EM Normandie - École de Management de Normandie = EM Normandie Business School
Latifa Saleh Iben Ammar: PSAU - Prince Sattam Bin Abdul-Aziz University

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Abstract: The impact of U.S. monetary policy (USMP) on domestic interest rates and goods markets in Emerging Market Economies (EMEs) remains a subject of ongoing debate. We investigate the fluctuations in U.S. interest rates across 17 inflation-targeting EMEs with flexible exchange rates from 2000–2020. Our findings reveal asymmetric contagion effects, with U.S. interest rate decrease having a more significant short-term impact than rate hikes. Long-term U.S. rates minimally influence EMEs' domestic rates. Resilience is observed in EMEs with robust GDP growth and favorable trade balances, while increased capital inflows and stock market surges heighten contagion risks. Focusing on the short-term contagion effect on goods markets through international trade drivers, we find that global capital flows and US dollar fluctuations, combined with a rise in the FED rate, contribute to the deterioration of EMEs' trade balance. The study underscores the need for EMEs to monitor and respond to U.S. monetary policy changes for financial stability and advocates for enhanced international dialogue among policymakers.

Keywords: Contagion; Emerging market economies; Asymmetric; Rates; Monetary policy (search for similar items in EconPapers)
Date: 2024-02-05
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Published in Journal of International Trade and Economic Development, 2024, 34 (1), pp.175-196. ⟨10.1080/09638199.2024.2310700⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04973469

DOI: 10.1080/09638199.2024.2310700

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