Monetary News, U.S. Interest Rate and Business Cycles in Emerging Economies

This paper identifies anticipated (news) and unanticipated (surprise) shocks to the U.S. Fed Funds rate using Fed Funds Futures contracts, and assesses their propagation to emerging economies. Anticipated shocks are identified as the expected change in the Fed Funds rate orthogonal to expected U.S. business cycle conditions while unanticipated shocks are the one-step ahead forecast error. Anticipation accounts for 80 percent of quarterly Fed Funds fluctuations and explains 47 percent of the narrative series of monetary policy shocks. To identify the effects of both shocks, I estimate a Panel VAR using a sample of emerging economies. An anticipated (unanticipated) 25 basis points contractionary U.S. interest rate shock induces a fall of 0.5 percent in GDP from its trend one quarter before (after) the shock materializes. This effect is coupled with a depreciation of the exchange rate, an increase in sovereign spreads, and a decline in external credit. Accounting for anticipation almost doubles the role of U.S. interest rate shocks as a driver of business cycles in emerging economies, explaining almost 20 percent of output fluctuations.