Evolving spillovers of U.S. monetary policy to emerging markets

Abstract

This study investigates how the spillover effects of U.S. monetary policy tightenings on emerging markets have evolved over time, specifically examining the changes in the magnitude of these effects. The analysis focuses on the tightening periods of 1994, 2004, 2015, and 2022, utilizing a four-variable Bayesian Vector Autoregression (BVAR) model with stochastic volatility. The findings reveal apparent differences in both the magnitude of the impacts and the dominant channels across time and countries. In particular, exchange rate and real economy responses vary depending on each country’s specific periods and structural vulnerabilities. Overall, the results show that the spillover effects of U.S. monetary policy shocks have not weakened uniformly over time; instead, they have differed depending on the nature of the shocks, global financial conditions, and domestic dynamics of the countries.