International spillovers of US unconventional monetary policy to emerging market economies

Abstract

This paper analyses whether US unconventional monetary policy (UMP) shocks contribute to the global financial and macroeconomic conditions in EMEs. Using global VAR models, we assessed the possible effects of US UMP on financial and macroeconomic conditions in EMEs and documented the credit channels through which potential spillovers occur, focusing on cross-border portfolio flows. We found that US UMP leads to an increase in bond outflows, in turn, the rise of inflows to EMEs results in a significant response by financial variables, indicating that US UMP generates sizable spillovers by financial terms in EMEs. While these results represent commonalities within a country, there is evidence of cross-country heterogeneity. The magnitude of spillovers depends on the EMEs' trade integration, exchange rate regime, and financial market development. The results of this thesis suggest that EMEs’ policymakers could mitigate their financial vulnerability to US UMP by fostering flexibility of exchange rates as well as domestic financial market development, while such policy might reduce long-run growth.