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The Decomposition of the Impact of International Monetary Spillovers to Emerging Market Economies

Feb 2020
By  Francisco Eduardo Luna A. Santos, Márcio G. P. Garcia

Using monthly data between January 2002 and September 2017, we decompose US monetary spillovers to interest rates and foreign exchanges of four EMEs: Brazil, Chile, Colombia, and Mexico. Our estimates point to larger US monetary policy spillovers after the Global Financial Crisis (GFC) in Brazil and Colombia, while Chile presents a higher degree of monetary autonomy. In Mexico, we identify large and stable monetary spillovers in the sample period. The impact on the currency market is smaller, in general, expect in Brazil, whose currency presents a higher sensitivity to variations in US interest rates. Our findings suggest central banks adjust the response of domestic monetary policy to counterbalance spillover effects on the currency market but this is not an effective strategy.