U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter

Using a macroeconomic model, we explore how sources of shocks and vulnerabilities matter for the transmission U.S. monetary changes to emerging market economies (EMEs). We utilize calibrated two-country New Keynesian model with financial frictions, partly-dollarized balance sheets, imperfectly anchored inflation expectations. Contrary other recent studies that also emphasize shocks, our approach allows quantification effects on real variables as well, in addition spillovers. Moreover, most relevant structurally. show higher interest rates arising from stronger aggregate demand generate modestly positive spillovers economic activity EMEs fundamentals, but can be adverse vulnerable EMEs. In contrast, tightenings driven by more-hawkish policy stance cause substantial slowdown all Our captures challenging tradeos EME central banks face. these tradeoffs are more favorable when expectations well anchored.