US monetary policy spillovers to Emerging Markets
Andres–Escayola et al. in this paper examine how spillovers from U.S. monetary policy shocks affect emerging market economies (EMEs) and what factors shape the strength of these spillovers. The authors use a panel dataset of 14 EMEs from 2000 to 2022 and employ a panel local projections model to estimate spillover effects. U.S. monetary policy shocks are proxied using high-frequency identified surprises around Federal Reserve announcements. Macro-financial vulnerability is measured using an index based on exchange rate misalignment, inflation expectations, and foreign currency liabilities. Domestic monetary policy stance is assessed by comparing actual policy rates to those implied by estimated central bank reaction functions. Their main findings include:
- U.S. monetary policy tightening has significant spillover effects on EMEs, leading to tighter financial conditions, lower industrial production, and lower consumer prices.
- The spillover effects are amplified when EMEs have higher macro-financial vulnerabilities.
- EMEs with more prudent domestic monetary policy stances experience more limited spillovers from U.S. monetary policy shocks. This explains why many EMEs have shown greater resilience during the recent U.S. monetary tightening cycle compared to past episodes. ” Taking into account the pace at which monetary policy tightened in the US and across the globe, their recent resilience is remarkable.”
What shapes spillovers from monetary policy shocks in the United States to emerging market economies?
Authors: Erik Andres–Escayola, Peter McQuade, Christofer Schroeder, Marcel Tirpák
From: ECB
ECB’s monetary policy spillovers to Eastern European countries
Engler et al. in this paper examine how spillovers from ECBS’s monetary policy shocks affect 16 Eastern European neighbors and what factors shape the strength of these spillovers. The authors focused on the ECB policy announcement in June 2022 and analyzed a 12-week period around the announcement using daily data on financial variables like CDS spreads, bond yields, and exchange rates to shed light on spillovers to financial variables. They also use quarterly data from 1999 to 2022 and a local projection method over a long time period to provide insight into responses of macroeconomic variables, including quarterly output. Finally, Engler et al. employed a two-country DSGE model calibrated to the euro area and emerging European economies and incorporated financial frictions and segmented asset markets. Their findings include:
- ECB monetary policy tightening has substantial spillover effects on emerging European economies: It leads to more than one-for-one increases in government bond yields in emerging Europe, causes sizable increases in sovereign spreads (up to 60 basis points) and results in domestic currency depreciation. Output is significantly lowered, with a drop of about 0.5% in real output after two years.
- The magnitude of spillovers depends on country fundamentals: Countries with weaker fundamentals experience larger effects. Economies with flexible exchange rates (e.g. Albania, Hungary, Poland) were generally better able to cope with adverse consequences. Countries with pegged currencies or euroized economies faced greater challenges. Strong reserve buffers and lower financing needs act as mitigating factors.
- The composition and pace of ECB tightening matters: Conventional tightening through interest rate hikes provides a more favorable inflation-output trade-off compared to balance sheet tightening (quantitative tightening). Gradual and predictable quantitative tightening has moderate spillovers, but accelerated QT can have significant effects.
- Exchange rate regimes influence spillover effects: Adverse spillovers tend to be more pronounced under fixed exchange rate regimes compared to inflation targeting regimes with floating currencies.
ECB Spillovers to Emerging Europe: The Past and Current Experience
Authors: Philipp Engler, Gianluigi Ferrucci, Pawel Zabczyk, Tianxiao Zheng
From: IMF
