Global monetary policy surprises and their transmission to emerging market economies: An external VAR analysis

Abstract

This paper analyzes how monetary policy surprises in the U.S. affect emerging market economies (EMs) by focusing on the transmission through the real exchange rate (RER) and country spreads (EMBI). To do so, I disentangle U.S. interest rate movements between both a pure monetary policy shock and an information shock; while the former is constructed based on high-frequency movements of interest rates around Federal Open Market Committee (FOMC) announcements, the latter builds from employment releases. I quantify the relative impacts using a structural VAR (SVAR) model with external instruments. The results suggest that a pure monetary policy shock produces a persistent appreciation of the RER in the U.S. coupled with an increase of the EMBI, which induces contractionary effects in the real sector of EMs. In contrast, an information shock does not necessarily produce such contractionary effects in EMs. These results contribute to the literature by identifying the specific drivers behind Fed announcements and its transmission channels to EMs.