Working Paper: NBER ID: w18557
Authors: Sebastian Edwards
Abstract: In this paper I use weekly data from seven emerging nations - four in Latin America and three in Asia - to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s. The results suggest that there is indeed an interest rates "pass through" from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different - in terms of impact, steady state effect, and dynamics - in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a "twist" policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.
Keywords: Federal Reserve; Emerging Markets; Capital Controls; Interest Rates; Monetary Policy
JEL Codes: F30; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's policy interest rates (E52) | domestic short-term interest rates in emerging markets (E43) |
| Federal Reserve's policy interest rates (E52) | domestic short-term interest rates in Asia (E43) |
| Federal Reserve's policy interest rates (E52) | domestic short-term interest rates in Latin America (N26) |
| capital controls (F38) | impact of U.S. interest rate changes on domestic interest rates (E43) |
| capital mobility (F20) | sensitivity to U.S. interest rate changes (E43) |
| Federal Reserve's policy interest rates (E52) | domestic interest rates in emerging markets (E43) |