Evaluating the Effects of the US Monetary Policy Stance on Emerging Economies’ Monetary Policy Independence

Using Taylor rule, this paper evaluates the effects of the US monetary policy stance on monetary policy framework in 14 emerging market economies (EMEs). We estimate three different Taylor rule specifications for EMEs central banks- an augmented open economy Taylor rule, a Taylor rule featuring exchange rate expectation and EMEs Taylor rule that incorporates the US Taylor rule. The study uses monthly data for the period 2000 to 2023 and applies pooled and OLS regressions. Generally, the results reveal that EMEs’ central banks react to the US monetary policy stance over the full sample period, indicating low degree of monetary independence in EMEs. However, the results for the pre and post 2008 global crises show that EMEs central banks’ reactions to the US monetary policy stance have diminished post 2008 global crises, indicating increasing monetary independence in EMEs post 2008 financial crises. Further, the findings show that EMEs’ central banks do not react to the US inflation and US output. The country-specific estimates reveal that central banks in 9 out of 14 EMEs react to the US monetary policy stance while 7 EMEs react to the US inflation and output dynamics. Lastly, the findings show that EMEs’ policy rates are more sensitive to the US Fed funds rate than to the exchange rate, suggesting that the EMEs central banks adopt pre-emptive stance to dampen exchange rate fluctuations.