Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks

Woon Gyu Choi, Taesu Kang (), Geun-Young Kim () and Byongju Lee ()
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Taesu Kang: Bank of Korea
Geun-Young Kim: Bank of Korea
Byongju Lee: Bank of Korea

No 532, ADB Economics Working Paper Series from Asian Development Bank

Abstract: We assess the effect of the United States (US) and domestic monetary policies on emerging market economies (EMEs) using a panel factor-augmented vector autoregressive model. We find a US policy rate hike outstrips a tantamount hike in EME policy rates in its impacts on EMEs and discover that bond flows are more sensitive to interest rate differentials than are equity flows. Tighter global or EME-specific policy entails divergent responses of growth and inflation in EMEs: in particular, the output loss is greater in those EMEs with higher inflation. When US monetary policy tightens, bond and equity markets in EMEs are prone to outflows. Domestic policy alone is not enough to counteract the effects of global policy shocks on capital flows in EMEs.

Keywords: divergent responses; global liquidity; monetary transmission; panel factor-augmented VAR (search for similar items in EconPapers)
JEL-codes: F32 F42 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2017-12-19
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:adbewp:0532

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