Authors: Shaghil Ahmed, Ozge Akinci, and Albert Queralto
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Staff Reports
U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter
Number 972
June 2021 Revised September 2024
June 2021 Revised September 2024
JEL classification: E32, E44, F41
We use a macroeconomic model to explore how policy drivers and country vulnerabilities matter for the transmission of U.S. monetary policy shifts to emerging markets. Our model features imperfections in domestic and international financial markets and imperfectly anchored inflation expectations. We show that higher U.S. interest rates arising from stronger U.S. demand generate modestly positive spillovers to activity in emerging markets with stronger fundamentals, but can be adverse for vulnerable countries. In contrast, U.S. monetary tightenings driven by a more-hawkish policy stance cause a substantial slowdown in all emerging markets. Our model captures the challenging policy tradeoffs that emerging market central banks face, and we show that these tradeoffs are more favorable when inflation expectations are well anchored. We use our model to estimate the effects on emerging markets of the 2022-23 U.S. monetary tightening, and compare the model-predicted effects against actual real and financial outcomes in those countries.
Author Disclosure Statement(s)
Shaghil Ahmed
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ozge Akinci
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Albert Queralto
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ozge Akinci
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Albert Queralto
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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