How Does U.S. Monetary Policy Influence Economic Conditions in Emerging Markets?

Vivek B. Arora · Martin D. Cerisola

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Market Dynamics and Volatility

Abstract

This paper quantifies the economic impact of changes in U.S. monetary policy on emerging market countries. We explore empirically how country risk, as proxied by sovereign bond spreads, is influenced by U.S. monetary policy, country-specific fundamentals, and conditions in global capital markets. In addition, we simulate the direct effects of a tightening in U.S. monetary policy on economic conditions in developing countries. While country-specific fundamentals are important in explaining fluctuations in country risk, the stance and predictability of U.S. monetary policy are also important for stabilizing capital flows and capital market conditions and fostering economic growth in developing countries.

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References

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2005The transmission of US shocks to Latin America 2007Emerging markets’ spreads and global financial conditions 2009How Does Liquidity Affect Government Bond Yields?2013Sovereign bond spreads determinants in Latin American countries: Before and during the XXI financial crisis 2011Sovereign Credit Ratings and Spreads in Emerging Markets 2002Convergence and Divergence of Sovereign Bond Spreads: Theory and Facts from Latin America

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