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Flights-to-safety and macroeconomic adjustment in emerging markets: The role of U.S. monetary policy

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  • Ahmed, Rashad

Abstract

This paper constructs a global financial flight-to-safety (FTS) index that measures risk-off/risk-on sentiment using daily asset prices disciplined with sign and magnitude restrictions. This FTS index is correlated with U.S. Dollar returns and global financial conditions but uncorrelated with high-frequency U.S. monetary policy shocks, providing a novel setup to jointly compare international financial and monetary spillovers under relatively mild identification assumptions. Estimates from a multi-country VAR show that FTS induce wider sovereign spreads, currency depreciation, and slower economic growth in emerging markets. Coincident U.S. monetary policy expansions offset these FTS spillovers by about 30% while coincident policy contractions magnify them, suggesting a prominent role for U.S. policy in shaping financial stability abroad.

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  • Ahmed, Rashad, 2023. "Flights-to-safety and macroeconomic adjustment in emerging markets: The role of U.S. monetary policy," Journal of International Money and Finance, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:jimfin:v:133:y:2023:i:c:s0261560623000281
    DOI: 10.1016/j.jimonfin.2023.102827
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    More about this item

    Keywords

    Tail risk; Risk-off; International capital flows; Financial spillovers; Monetary policy;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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