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Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks

Author

Listed:
  • Choi, Woon Gyu

    () (International Monetary Fund)

  • Kang, Taesu

    () (Bank of Korea)

  • Kim, Geun-Young

    () (Bank of Korea)

  • Lee, Byongju

    () (Bank of Korea)

Abstract

We assess the effect of the United States (US) and domestic monetary policies on emerging market economies (EMEs) using a panel factor-augmented vector autoregressive model. We find a US policy rate hike outstrips a tantamount hike in EME policy rates in its impacts on EMEs and discover that bond flows are more sensitive to interest rate differentials than are equity flows. Tighter global or EME-specific policy entails divergent responses of growth and inflation in EMEs: in particular, the output loss is greater in those EMEs with higher inflation. When US monetary policy tightens, bond and equity markets in EMEs are prone to outflows. Domestic policy alone is not enough to counteract the effects of global policy shocks on capital flows in EMEs.

Suggested Citation

  • Choi, Woon Gyu & Kang, Taesu & Kim, Geun-Young & Lee, Byongju, 2017. "Divergent Emerging Market Economy Responses to Global and Domestic Monetary Policy Shocks," ADB Economics Working Paper Series 532, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0532
    as

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    References listed on IDEAS

    as
    1. Peter J. Morgan, 2011. "Impact of US Quantitative Easing Policy on Emerging Asia," Macroeconomics Working Papers 23215, East Asian Bureau of Economic Research.
    2. Emmanuel Farhi & Iván Werning, 2014. "Dilemma Not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(4), pages 569-605, November.
    3. Edwards, Sebastian, 2010. "The international transmission of interest rate shocks: The Federal Reserve and emerging markets in Latin America and Asia," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 685-703, June.
    4. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    5. Rey, Hélène, 2015. "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence," CEPR Discussion Papers 10591, C.E.P.R. Discussion Papers.
    6. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
    7. Valente, Giorgio, 2009. "International interest rates and US monetary policy announcements: Evidence from Hong Kong and Singapore," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 920-940, October.
    8. Kim, Soyoung & Yang, Doo Yong, 2009. "International Monetary Transmission and Exchange Rate Regimes: Floaters vs. Non-Floaters," ADBI Working Papers 181, Asian Development Bank Institute.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    divergent responses; global liquidity; monetary transmission; panel factor-augmented VAR;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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