Impact of Uncertainty Created by the US Post-QE Monetary Policy on Emerging Economies

Abstract

This research studies the impact of uncertainty generated by the US monetary policy in the post-quantitative easing period, particularly regarding the timing and pace of policy rate normalization by the Federal Reserve. We are specifically interested in the effects on emerging market economies such as South Korea. By using a news-based uncertainty index to measure the extent of monetary policy uncertainty in the US, we find that unexpected increased uncertainty with respect to the US monetary policy has significant adverse impact on the KRW/USD exchange rate, stock prices, and capital inflow to South Korea, but does not significantly affect the macroeconomic variables of the country, such as output and consumer prices. Therefore, we expect that heightened uncertainty regarding US monetary policy normalization would, at most, have temporary disruptions in financial markets but does not have a large impact on emerging market economies.

Keywords: Monetary policy uncertainty, quantitative easing, emerging market economies

JEL Classification: E44, E52, E58, F41