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Spillovers of U.S. fiscal challenges: The global impact of U.S. fiscal dominance concerns on interest rates in emerging and developed markets

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  • Aizenman, Joshua
  • Eldén, William
  • Jinjarak, Yothin
  • Uddin, Gazi Salah
  • Widholm, Frida

Abstract

This study examines the international spillovers of U.S. inflationary spells and fiscal concerns on policy interest rates in Emerging Market Economies (EMEs) and Developed Economies (DEs). Previous research has focused on fiscal concerns in domestic environments, overlooking cross-border impacts. Using data from EMEs and DEs, we construct a novel index of fiscal dominance concerns through Principal Components Analysis to capture international fiscal dynamics. The results are confirmed by robustness analysis and show that greater U.S. fiscal challenges affect negatively the policy rates in both EMEs and DEs, with a greater impact observed in EMEs. Moreover, a low degree of financial repression in EMEs is associated with more significant spillover effects from greater U.S. fiscal challenges. Our findings offer insights into the complex interplay between financial repression, central bank independence, and global market integration in shaping a country's resilience to international financial influences.

Suggested Citation

  • Aizenman, Joshua & Eldén, William & Jinjarak, Yothin & Uddin, Gazi Salah & Widholm, Frida, 2026. "Spillovers of U.S. fiscal challenges: The global impact of U.S. fiscal dominance concerns on interest rates in emerging and developed markets," Economic Modelling, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:ecmode:v:154:y:2026:i:c:s0264999325003591
    DOI: 10.1016/j.econmod.2025.107364
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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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