External Shocks, U.s. Monetary Policy and Macroeconomic Fluctuations in Emerging Markets

This paper uses a structural VAR model to quantify the extent of international dependence of several emerging markets in Asia and Latin America. A sizable fraction of macroeconomic fluctuations in emerging markets is attributable to external shocks (in many cases more than 50%). External factors are dichotomized into “U.S. monetary policy” and “everything else” shocks. This further decomposition reveals that only a modest portion of the variation in emerging markets is attributable to shifts in U.S. monetary policy (less than 10% in most cases). A typical response in emerging markets to a tightening by the Federal Reserve is an exchange rate depreciation, inflation and an output contraction. Date: December 2001. Revised February 2003.