Information Shocks in the U.S. and Asset Mispricing in Emerging Economies

Marc Pourroy () and Antonia Lòpez-Villavicencio ()
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Marc Pourroy: Axe 1 (2022-2027) : "Vulnérabilités et risques" (MSHS Poitiers) - MSHS de Poitiers [Maison des sciences de l'homme et de la société de Poitiers] - Maison des sciences humaines et sociales de Poitiers [UAR 3565] - UP - Université de Poitiers = University of Poitiers - CNRS - Centre National de la Recherche Scientifique, LéP [Poitiers] - Laboratoire d'économie de Poitiers [UR 13822] - UP - Université de Poitiers = University of Poitiers
Antonia Lòpez-Villavicencio: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: We investigate the impact of the Federal Reserve's announcements regarding a tighter monetary policy on asset prices in emerging economies. Employing local projections, we show that there is a significant and robust decline of equity markets in EMEs to pure U.S. monetary policy shocks, leading to potential undervaluation. However, we uncover a contrasting effect when examining the information content within tightening announcements, as they tend to result in over-valuation of asset prices. We attribute these divergent responses to market perceptions of signaling a better-than-expected economic outlook. Additionally, we find that not only financial but also real integration play a role in influencing the transmission of information shocks. Our findings con- tribute to understanding the channels through which global monetary policy affects emerging economies, emphasizing the importance of information content of policy announcements and trade integration in shaping asset price booms and busts.

Keywords: emerging markets; asset mispricing; monetary policy; information channel; local projection (search for similar items in EconPapers)
Date: 2024-09-20
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Published in French/Japanese Conference on Asian and International Economies in a Era Globalization, Sciences Po Aix, AMSE; Yokohama National University, Sep 2024, Aix en Provence, France

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