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The Transmission of US Monetary Policy Normalization to Emerging Markets

In: International Spillovers of Monetary Policy

Author

Listed:
  • Kólver Hernández

    (Banco de México)

Abstract

In this chapter, I analyze the potential macroeconomic effects of the normalization of US monetary policy for emerging market economies (EMEs), in particular for Mexico. I build on the work of Hernandez and Leblebicioglu (2016) by adding monetary elements to their two-country DSGE model that endogenizes multiple transmission channels for the transmission of international shocks. Among those channels are the exchange rate, international bank lending, international trade and monetary policy rates. Based on a Bayesian estimation of the deep parameters of the model, I simulate scenarios that yield an equilibrium in which us monetary policy rate would increase in the last two quarters of 2015. The underlying conditions that promote the normalization of monetary policy in USA imply favorable growth of around 2.4% in GDP and an average increase of 25 basis points in us policy rate. For Mexico, those conditions carry positive international spillovers that result in an average GDP growth of 2.8%. The increa e in us rate calls for a response in Mexico’s policy rate in more than one to one, i.e., it calls for an aggressive response. Mexico’s policy rate hike contains the depreciation of the exchange rate and stabilizes inflation.

Suggested Citation

  • Kólver Hernández, 2017. "The Transmission of US Monetary Policy Normalization to Emerging Markets," Investigación Conjunta-Joint Research, in: Ángel Estrada García & Alberto Ortiz Bolaños (ed.), International Spillovers of Monetary Policy, edition 1, chapter 2, pages 15-30, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    • Handle: RePEc:cml:incocp:3-02
    Note: Joint Research Program XX Meeting of the Central Bank Researchers Network
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    References listed on IDEAS

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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