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Monetary Policy Spillovers in Emerging Economies

by Serletis, Apostolos and Azad, Nahiyan

This paper explores for spillovers from monetary policy in the United States to a number of emerging market economies. We estimate the Elder and Serletis (2010) bivariate structural GARCH-in-Mean VAR in the U.S. monetary policy rate and the policy rate of each of six emerging economies that target the inflation rate — Brazil, Chile, Mexico, Romania, Serbia, and South Africa. We also estimate the same model in the U.S. monetary policy rate and the exchange rate (against the U.S. dollar) of each of six emerging economies that target the exchange rate — Bosnia and Herzegovina, Bulgaria, Comoros, Croatia, the Former Yugoslav Republic of Macedonia, and Montenegro. Our evidence suggests that positive (negative) U.S. monetary policy shocks tend to appreciate (depreciate) the currencies of the exchange rate targeting emerging economies, but have an ambiguous effect on the policy rates of the inflation-targeting emerging economies. Moreover, monetary policy uncertainty in the United States leads to an increase in policy rates in those emerging economies that target the inflation rate and to a depreciation of the currencies of those emerging economies that target the exchange rate.

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