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Beyond borders: spillover effects of US monetary policy on the financial stress of emerging market economies

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  • Sen, Aariya
  • Sensarma, Rudra

Abstract

Greater integration among world economies have made Emerging Market Economies (EMEs) susceptible to actions of developed countries. While the literature has studied cross-border ramifications of monetary policy decisions, the effects on financial stress and the role of policy independence of the domestic economies have been ignored. We examine the spillover effects of the US Fed’s monetary policy, including Unconventional Monetary Policy (UMP) episodes, on financial stress of EMEs. We also explore the role of EMEs’ monetary policy independence by examining whether the spillover effects are moderated by the responsiveness of an EME’s interest rates to that of the US. We analyse the impact of the US Monetary Policy Shocks (MPS) on the financial stress and monetary independence of 18 EMEs during 2008–2021. The results from Pooled Mean Group estimation reveal that Fed monetary tightening is associated with higher financial stress of EMEs. Furthermore, monetary independence of the EMEs provide a buffer from these spillover effects. These findings underscore the importance of EMEs recognizing the spillover effects of global shocks on their financial markets and the need to safeguard themselves through appropriate institutional design.

Suggested Citation

  • Sen, Aariya & Sensarma, Rudra, 2026. "Beyond borders: spillover effects of US monetary policy on the financial stress of emerging market economies," Journal of International Money and Finance, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:jimfin:v:161:y:2026:i:c:s0261560625002359
    DOI: 10.1016/j.jimonfin.2025.103500
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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