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

57 Pages Posted: 2 Dec 2020 Last revised: 6 Mar 2023

See all articles by Rashad Ahmed

Rashad Ahmed

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: October 14, 2020

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

Suggested Citation

Ahmed, Rashad, Flights-to-Safety and Macroeconomic Adjustment in Emerging Markets: The Role of U.S. Monetary Policy (October 14, 2020). Available at SSRN: https://ssrn.com/abstract=3711790 or http://dx.doi.org/10.2139/ssrn.3711790

Rashad Ahmed (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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