Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks | Asian Development Bank

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

Publication | December 2017
Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks

This paper investigates how the United States and domestic monetary policy rates affect macroeconomic conditions in emerging market economies.

Building on attempts to gauge the impact policy changes in advanced economies have on emerging economies, this paper investigates how the United States (US) and domestic monetary policy rates affect macroeconomic conditions in emerging market economies (EMEs). Findings indicate that the impact of US policy rate hikes outstrips the effects associated with domestic rate hikes in EMEs. When US monetary policy tightens, bond and equity markets in EMEs are prone to experiencing outflows.

Results also show that bond flows are more sensitive to interest rate differentials than are equity flows. It is also found that the magnitude of the effects varies within the group of EMEs, with greater output variations in those EMEs with higher inflation. Consequently, domestic policy alone is not enough to counteract the effects of global policy shocks on capital flows in EMEs.

Contents 

  • Introduction
  • Empirical Model
  • Emerging Market Economy Responses to United States and Domestic Monetary Tightening
  • Divergent Responses of Emerging Market Economies to United States Monetary Policy Shocks
  • Conclusions