The Impact of Industrialized Countries’ Monetary Policy on Emerging Economies

Abstract

Following the low interest rate policies adopted by industrialized countries after the 2008 financial crisis, there has been a reduction in capital outflows from emerging countries to industrialized countries. Together with the lower outflows of capital, emerging countries experienced a decline in output growth bigger than industrialized countries. This paper develops a model capable of replicating this pattern. Contrary to conventional wisdom, the model shows that lower interest rates in industrialized countries could have negative macroeconomic consequences for emerging countries even though emerging economies experience increased inflows (or decreased outflows) of capital.