US Monetary Policy Spillovers

HKIMR Working Paper No. 17/2017

42 Pages Posted: 3 Aug 2017

See all articles by Saroj Bhattarai

Saroj Bhattarai

University of Texas at Austin - Department of Economics

Arpita Chatterjee

UNSW Australia Business School, School of Economics

Woong Yong Park

Seoul National University

Date Written: July 31, 2017

Abstract

We study international spillover effects of US monetary policy. We use monthly panel data from fifteen major emerging market economies (EMEs), in a period where the countries have a flexible exchange rate regime and are integrated into global financial markets. We show that US monetary policy shocks have significant financial and macroeconomic effects abroad. A contractionary US monetary policy shock leads to an increase in long-term country spread and short-term policy rate, and a depreciation of the exchange rate, of the EMEs. Also, their domestic stock prices and capital inflows into these countries decline. These adverse financial effects are accompanied by a contraction in EME output and an increase in their external balance. The contraction in economic output is stronger, and the increase in external balance weaker, for countries that raise their monetary policy rate by more. These results suggest that US monetary policy spillovers lead to a non-trivial monetary policy trade-off for EMEs and that the classic open economy policy trilemma might be morphing into a policy dilemma.

Keywords: US Monetary Policy Spillovers, Emerging Market Economies, Policy Dilemma vs. Trilemma, Policy Tradeoffs, Panel VAR

JEL Classification: C33, E44, E52, E58, F32, F41

Suggested Citation

Bhattarai, Saroj and Chatterjee, Arpita and Park, Woong Yong, US Monetary Policy Spillovers (July 31, 2017). HKIMR Working Paper No. 17/2017. Available at SSRN: https://ssrn.com/abstract=3011843 or http://dx.doi.org/10.2139/ssrn.3011843

Saroj Bhattarai (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Arpita Chatterjee

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Woong Yong Park

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Register to save articles to
your library

Register

Paper statistics

Downloads
29
Abstract Views
221
PlumX Metrics