Divergent EME Responses to Global and Domestic Monetary Policy Shocks

Abstract

We assess the effect of tighter monetary policy in the U.S. and emerging market economies (EMEs) on EMEs using a panel factor-augmented VAR model. We find that a U.S. policy rate hike outstrips an equivalent domestic rate hike in its impacts on EMEs. In addition, EMEs show divergent policy responses and their macro-financial responses differ depending upon their economic fundamentals in the face of tighter U.S. policy. In particular, we find that high-inflation than low-inflation EMEs are more susceptible to the shock stemming from a U.S. federal funds rate hike.