Shaghil Ahmed, Ozge Akinci, Albert QueraltoWe use a macroeconomic model to explore how policy drivers and country vulnerabilities matter for the transmission of U.S. monetary policy shifts to emerging markets. Our model features imperfections in domestic and international financial markets and imperfectly anchored inflation expectations. We show that higher U.S. interest rates arising from stronger U.S. demand generate modestly positive spillovers to activity in emerging markets with stronger fundamentals but can be adverse for vulnerable countries. In contrast, U.S. monetary tightenings driven by a more-hawkish policy stance cause a substantial slowdown in all emerging markets. Our model captures the challenging policy tradeoffs that emerging market central banks face, and we show that these tradeoffs are more favorable when inflation expectations are well anchored. We use our model to estimate the effects on emerging markets of the 2022-23 U.S. monetary tightening and compare the model-predicted effects against actual real and financial outcomes in those countries.
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