Testing of leader-follower interaction between fed and emerging countries’ central banks

Abstract

This study aims to investigate the structure of the leader-follower mechanism between policy decisions of central banks of emerging countries (Indonesia, Israel, South Korea, Thailand, and Turkey, henceforth ECCB) and Fed policy decisions. To determine whether a systematic leader-follower relationship between the ECCB and the Fed exists, policy decisions (interest rates) of the Fed and the ECCB was examined first. In this context, the direction of the causal relation between the policy decisions of Fed and ECCB was discussed and the Hatemi-J asymmetric causality test was applied. According to the test results, while there is no evidence of symmetrical and asymmetrical causality from ECCB policy rates to Fed policy rate, some findings of symmetrical and asymmetrical causality from Fed policy rate to ECCB policy rates is reached. As a result of these findings, we see that some central banks within the ECCB follow Fed policy decisions. However, these follower strategies are closely related to Fed’s contractionary or expansionary stance.