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Effects of US interest rate shocks in the emerging market economies: Evidence from panel structural VAR

Author

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  • Shweta Sikhwal

    (HSE University, Moscow, Russia)

Abstract

We examine, using a monthly dataset from 2007 to 2020, the US interest rate shocks' effects on exchange rates, broad money aggregates, and foreign exchange reserves in emerging market economies (EMEs) post global financial crisis. To evaluate the impact of unconventional monetary policy initiatives, we employ Wu-Xia's shadow interest rates. There are two parts to the methodology. The first part focuses on the identification of the unanticipated US interest rate shock in a SVAR model. In the second part, we incorporate the US interest rate shock into the panel structural VAR to analyze its impact on 29 countries from various regions. A positive shock to US interest rates depreciates the exchange rate of EMEs against the US dollar. According to our findings, it results in a decline in the broad money aggregate and foreign exchange reserves. The findings are consistent across multiple EME regions.

Suggested Citation

  • Shweta Sikhwal, 2022. "Effects of US interest rate shocks in the emerging market economies: Evidence from panel structural VAR," Russian Journal of Economics, ARPHA Platform, vol. 8(3), pages 234-254, October.
    • Handle: RePEc:arh:jrujec:v:8:y:2022:i:3:p:234-254
    DOI: 10.32609/j.ruje.8.89717
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    Keywords

    US interest rate emerging market economies shadow rate panel structural VAR.;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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