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

Author

Listed:
  • Choi, Woon Gyu

    (International Monetary Fund)

  • Kang, Taesu

    (Bank of Korea)

  • Kim, Geun-Young

    (Bank of Korea)

  • Lee, Byongju

    (Bank of Korea)

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.

Suggested Citation

  • Choi, Woon Gyu & Kang, Taesu & Kim, Geun-Young & Lee, Byongju, 2017. "Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks," ADB Economics Working Paper Series 532, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0532
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    References listed on IDEAS

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    Cited by:

    1. Katharina Bergant & Francesco Grigoli & Niels‐Jakob Hansen & Damiano Sandri, 2024. "Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(6), pages 1405-1438, September.
    2. Cecchetti, Stephen G. & Narita, Machiko & Rawat, Umang & Sahay, Ratna, 2023. "Addressing Spillovers from Prolonged U.S. Monetary Policy Easing," Journal of Financial Stability, Elsevier, vol. 64(C).
    3. Horvath, Jaroslav & Zhong, Jiansheng, 2019. "Unemployment dynamics in emerging countries: Monetary policy and external shocks," Economic Modelling, Elsevier, vol. 76(C), pages 31-49.

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    More about this item

    Keywords

    divergent responses; global liquidity; monetary transmission; panel factor-augmented VAR;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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