The Spillover Effects of US Unconventional Monetary Policy on Inflation and Non-Inflation Targeting Emerging Markets

Abstract

This study employs the panel vector autoregressive (PVAR) model to examine the spillover effect of US unconventional monetary policy on inflation and non-inflation targeting emerging markets post credit crunch and during COVID-19 from 2000Q1 to 2020Q4. Unlike other analyses, this paper adds to the existing body of knowledge by employing a dummy variable to represent the United States’ quantitative easing. Other included control variables are equity prices, the federal reserve rate, the exchange rate, central bank assets and the short-term interest rate. This paper estimated two-panel VARs, Model one and Model two, for inflation and non-inflation targeting emerging markets, respectively. Model one consists of eight inflation-targeting markets, and Model two consists of four non-inflation-targeting countries. Other included control variables are equity prices, the federal reserve rate, the nominal effective exchange rate, and the central bank policy rate. According to the empirical results, the US unconventional monetary policy induces a surge in the exchange rate and a decrease in the central bank policy rate for both inflation and non-inflation targeting emerging markets. However, there was no significant impact on the equity prices. The empirical results are statistically significant, robust, and consistent with previous studies except for the response of equity prices. Unconventional monetary policy is effective in steering macroeconomic variables in developed economies. The monetary policymakers in emerging markets must also use the currency reserve to stabilise the macroeconomic variables in response to US unconventional monetary policy shocks.

The Impact of Interest Rate Spillover on Output Gap: A Dynamic Spatial Durbin Model

“…A country's central bank determines its interest rate as a reference for other banks in its financial system (Iacoviello and Navarro 2019;Ntshangase et al 2023). Changes in the benchmark interest rate policies of leading countries worldwide are followed by changes in other countries' interest rate policies in the same direction (Georgiadis 2016;Iacoviello and Navarro 2019;Miranda-Agrippino and Rey 2020).…”

“…In response to the Fed's interest rate, the monetary authorities of ASEAN+3 countries implemented an expansionary monetary policy to improve economic conditions due to the COVID-19 pandemic. This interest rate spillover effect results in the appreciation of the domestic currency against foreign currencies and an increase in the output gap (Iacoviello and Navarro 2019;Krugman et al 2018;Ntshangase et al 2023). Thus, Hypothesis 2 is proposed.…”

“…In contrast, Indonesia, Malaysia, the Philippines, Singapore, and Thailand, countries with close trade relations and geographical proximity, are classified in the group of countries with output gap rates in the middle group (−0.044 to −0.028 billion USD) and lowest group (−0.086 to −0.044 billion USD). The figures show the spillover effect of US monetary authority policy on the output gap of countries in the region (Georgiadis 2016;Ntshangase et al 2023;Miranda-Agrippino and Rey 2020).…”

“…The increase in a country's output gap is not only influenced by the government's monetary policy but also by the monetary policy implemented by the monetary authorities of the world's leading countries. In this case, policies are spatially interdependent among the countries (Bhattarai et al 2020;Georgiadis 2016;Iacoviello and Navarro 2019;Ntshangase et al 2023;Tian et al 2023). The United States (US) central bank's interest rate policy, the Federal Reserve (Fed), affects the global economy (Iacoviello and Navarro 2019;X.…”

“…The United States (US) central bank's interest rate policy, the Federal Reserve (Fed), affects the global economy (Iacoviello and Navarro 2019;X. Tang 2022;Ntshangase et al 2023;Utama et al 2022). The Fed's tightening of the Federal Fund Rate (FFR) caused an interest rate differential between countries.…”