Flights-to-Safety and Macroeconomic Adjustment in Emerging Markets: The Role of U.S. Monetary Policy

Abstract

This paper constructs a global financial flight-to-safety (FTS) index that measures risk-off/risk-on sentiment using daily asset prices disciplined with sign and magnitude restrictions. This FTS index is correlated with U.S. Dollar returns and global financial conditions but uncorrelated with high-frequency U.S. monetary policy shocks, providing a novel setup to jointly compare international financial and monetary spillovers under relatively mild identification assumptions. Estimates from a multi-country VAR show that FTS induce wider sovereign spreads, currency depreciation, and slower economic growth in emerging markets. Coincident U.S. monetary policy expansions offset these FTS spillovers by about 30% while coincident policy contractions magnify them, suggesting a prominent role for U.S. policy in shaping financial stability abroad.

Keywords: Tail Risk, Risk-off, International Capital Flows, Financial Spillovers, Monetary policy

JEL Classification: F0, F3, F44, F60, G15