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When the Fed sneezes - Spillovers from U.S. Monetary Policy to Emerging Markets

Author

Listed:
  • Annette Meinusch

    () (Justus-Liebig-University Giessen)

Abstract

This paper aims to shed light on the role mean and volatility spillovers of U.S. monetary policy played for asset markets of several emerging market economies in a period from January 2000 to October 2014. We employ multivariate GARCH models in which we distinguish between a conventional and an unconventional monetary policy phase to account for possible heterogeneity in spillover e ects. Our results suggest that the anticipation of loose U.S. monetary policy has diverse effects across monetary policy regimes. While spillovers have little impact on equity returns, they put pressure on local currencies. However, they increase conditional volatilities of both stock and exchange rate returns considerably in most emerging economies within the conventional monetary policy period. These effects can be stronger during unconventional monetary policy times. In accordance with these findings, we observe a tighter link between U.S. monetary policy and foreign asset markets during the unconventional monetary policy phase. Volatility impulse responses show that conditional volatilities of foreign asset markets mainly decrease in response to historical shocks. Particularly during unconventional monetary policy times, U.S. shocks gain importance in explaining the change in conditional volatilities especially fr countries with less geographical distance to the United States.

Suggested Citation

  • Annette Meinusch, 2017. "When the Fed sneezes - Spillovers from U.S. Monetary Policy to Emerging Markets," MAGKS Papers on Economics 201730, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201730
    as

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2017/30-2017_meinusch.pdf
    File Function: First 201730
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    References listed on IDEAS

    as
    1. Dedola, Luca & Rivolta, Giulia & Stracca, Livio, 2017. "If the Fed sneezes, who catches a cold?," Journal of International Economics, Elsevier, vol. 108(S1), pages 23-41.
    2. Berge, Travis J. & Cao, Guangye, 2014. "Global effects of U.S. monetary policy: is unconventional policy different?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-31.
    3. Lim, Jamus Jerome & Mohapatra, Sanket & Stocker, Marc, 2014. "Tinker, taper, QE, bye ? the effect of quantitative easing on financial flows to developing countries," Policy Research Working Paper Series 6820, The World Bank.
    4. Apostolou, Apostolos & Beirne, John, 2017. "Volatility spillovers of Federal Reserve and ECB balance sheet expansions to emerging market economies," Working Paper Series 2044, European Central Bank.
    5. Leung, Henry & Schiereck, Dirk & Schroeder, Florian, 2017. "Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises," Economic Modelling, Elsevier, vol. 61(C), pages 169-180.
    6. Tse, Y. K., 2000. "A test for constant correlations in a multivariate GARCH model," Journal of Econometrics, Elsevier, vol. 98(1), pages 107-127, September.
    7. Christiane Baumeister & Luca Benati, 2013. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 165-212, June.
    8. Luiz De Mello & Diego Moccero, 2009. "Monetary Policy and Inflation Expectations in Latin America: Long-Run Effects and Volatility Spillovers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1671-1690, December.
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    More about this item

    Keywords

    emerging markets; monetary policy spillovers; multivariate GARCH; unconventional monetary policy; quantitative easing;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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