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Title: US Monetary Policy and International Risk Spillovers

Author(s): Sebnem Kalemli-Ozcan

Publication Date: October 2019

Keyword(s):

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: I show that monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies. The monetary policy of the U.S. affects domestic credit costs in other countries through its effect on global investors' risk perceptions. Capital flows in and out of emerging market economies are particularly sensitive to fluctuations in such risk perceptions and have a direct effect on local credit spreads. Domestic monetary policy is ineffective in mitigating this effect as the pass-through of policy rate changes into short-term interest rates is imperfect. This disconnect between short rates and monetary policy rates is explained by changes in risk perceptions. A key policy implication of my findings is that emerging markets' monetary policy actions designed to limit exchange rate volatility can be counterproductive.

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Bibliographic Reference

Kalemli-Ozcan, S. 2019. 'US Monetary Policy and International Risk Spillovers'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14053