Spillover Effects of US Monetary Policy on Emerging Markets Amidst Uncertainty

Author:

Povilas Lastauskas, Anh Dinh Minh Nguyen

Keyword:

Economics, General Economics, General Economics (econ.GN)

journal:

date:

2024-02-11 00:00:00

Abstract

This paper examines the impact of US monetary policy tightening on emerging markets, distinguishing between direct and indirect spillover effects using the global vector autoregression with stochastic volatility covering 32 countries. The paper demonstrates that an increase in the US interest rate significantly reduces output for emerging markets, leading to larger, more prolonged, and persistent declines. Such an impact is further intensified by global trade integration, causing a sharper yet slightly quicker rebounding output drop. The spillover effects are significantly amplified when US monetary policy tightening is accompanied by an increase in monetary policy uncertainty. Finally, emerging markets exhibit considerable heterogeneity in their responses to US monetary policy shocks.

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