U.S. Monetary Policy Spillovers to Emerging Market Countries: Responses to Cost-Push and Natural Rate Shocks

Published: 2 December 2024| Version 1 | DOI: 10.17632/jt33448jr6.1
Contributor:
Penghao Cheng

Description

The spillover effects of U.S. monetary policy on emerging markets can vary depending on the specific shock. Using a new Keynesian small open economy model, we find that under cost-push shocks, the exchange rate depreciates (USD weakens), whereas, under natural rate shocks, it appreciates (USD strengthens). These differences are amplified through domestic bonds (finance channel) and terms of trade (trade channel). Empirical Bayesian local projection results confirm the importance of the exchange-rate channel, with strong evidence supporting finance and weaker evidence for trade channels, likely due to emerging economies’ financial vulnerabilities. We also find that different structural drivers behind natural rate shocks affect the spillover.

Files

Steps to reproduce

See readme.pdf

Institutions

Liaoning University

Categories

Monetary Policy, Bayesian Analysis, Foreign Exchange, International Economic Policy Transmission, Simulation Modeling in Economics

Funding

National Office of Philosophy and Social Sciences

21BJL028

Liaoning Provincial Department of Human Resources and Social Security

2023lslwzzkt-014

Licence