The Spillover Effects of U.S. Monetary Policy Normalization on the BRICS Based on Panel VAR Model

Qi Deng,Weiguo Xiao,Huan Yan,Miaochao Chen

doi:10.1155/2022/3844128

Abstract

Using the monthly data from December 2008 to March 2018 and a panel vector autoregression (PVAR) model, this paper empirically analyzes the spillover effects of U.S. monetary policy normalization on the total output, inflation, trade balance, and exchange rates in BRICS. The results show that the Fed’s interest rate hike and balance sheet shrinking will both lead to a decrease in BRICS’ output, a decline in inflation, a deterioration in the trade balance, and a depreciation of the exchange rate. In addition, the spillover effects of the Fed’s interest rate hike and shrinking of a balance sheet are both relatively long lasting, but there is a certain difference between the two effects; that is, the Fed’s interest rate hike has a greater impact on the macroeconomic variables of BRICS countries than the shrinking of balance sheet. Based on the conclusions, we propose to establish and improve the regulatory system of international capital flows, pay close attention to commodity prices, and strengthen policy coordination and communication among BRICS countries so as to mitigate the adverse impact of U.S. monetary policy normalization.

Highlights

Since May 2013 to May 2018, the Federal Reserve has started the process of withdrawing quantitative easing measures and returning to the normalization of monetary policy
E results in Tables 2 and 3 show that the level values of gross domestic product (GDP), CPI, Balance of trade (BOT), REER, interest rate variable (IR), and Fed asset cannot reject the null hypothesis at the 1% significance level; that is, the original series of each variable is nonstationary, but the firstorder difference values significantly reject the null hypothesis at the 1% significance level
Using the panel vector autoregression (PVAR) model, this paper empirically analyzes the spillover effects of the Fed’s interest rate hike and balance sheet reduction on BRICS output, inflation rate, trade balance, and exchange rate. e main conclusions are as follows: first, the U.S monetary policy has a significant spillover effect on the BRICS countries. e Fed’s interest rate hike and shrinking its balance sheet will lead to the decline of output, inflation rate, trade balance deterioration, and currency depreciation in BRICS countries

Summary

Introduction

Since May 2013 to May 2018, the Federal Reserve has started the process of withdrawing quantitative easing measures and returning to the normalization of monetary policy. During this period, the international financial markets experienced severe turbulence, casting a shadow over the postcrisis recovery of the world economy. Under the dual effects of interest rate hikes and balance sheet shrinking, the U.S dollar will continue to strengthen in the medium and long term, which may lead to the depreciation of the exchange rate of other economies against the U.S dollar, increase the trade balance of other economies through the expenditureswitching effect, and benefit the real economic development of other economies

Objectives

Results

Conclusion