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What shapes spillovers from monetary policy shocks in the United States to emerging market economies?

Author

Listed:
  • Andres Escayola, Erik
  • McQuade, Peter
  • Schroeder, Christofer
  • Tirpák, Marcel

Abstract

Monetary policy decisions by the Federal Reserve System in the US are widely recognised to have spillover effects on the rest of the world. In this paper, we focus on the asymmetric effects of US monetary policy shocks on macro-financial outcomes in emerging market economies (EMEs). We shed light on how domestic factors shape external monetary policy spillover effects using indicators on the macro-financial vulnerabilities and monetary policy stances of EMEs. We find that a surprise tightening of monetary policy in the US leads to an immediate tightening of financial conditions which leads to a decline in activity and prices in EMEs over one year. Importantly, these effects are amplified in periods of high vulnerabilities and attenuated when EMEs follow a prudent monetary policy stance. Our findings help explain the greater resilience of many EMEs to the Fed’s post-COVID-19 tightening cycle, and highlight the benefits of the broad improvements of monetary policy frameworks in these countries. JEL Classification: F42, E58, E52, C32

Suggested Citation

  • Andres Escayola, Erik & McQuade, Peter & Schroeder, Christofer & Tirpák, Marcel, 2024. "What shapes spillovers from monetary policy shocks in the United States to emerging market economies?," Working Paper Series 2973, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20242973
    Note: 2104363
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    More about this item

    Keywords

    emerging markets; monetary policy; spillovers;
    All these keywords.

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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