Spillovers to Emerging Markets from US Economic News and Monetary Policy

IMF Working Papers, May 19, 2023

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Economic news in the United States, and not just monetary policy, affects financial conditions in emerging markets.
News about U.S. employment has the strongest effects on emerging market financial conditions.
News about U.S. economic activity has the next-strongest effects.
News about vaccines during the COVID-19 pandemic also materially affects emerging market financial conditions.
News about U.S. inflation has limited effects on average.
A key channel of international transmission of U.S. economic news appears to be the risk perceptions or risk aversion of international investors.
Some transmission of U.S. economic news occurs independently of the U.S. monetary policy reaction.
Financial conditions in the U.S. and emerging markets respond differently to U.S. monetary policy surprises, depending on the reaction of U.S. stock prices.

Risk perceptions or risk aversion of international investors function as a principal channel for transmitting U.S. economic news to emerging markets.
Transmission can occur both through news-driven changes in expectations and through channels that are independent of subsequent U.S. monetary policy actions.
Asset-price responses differ across markets, implying heterogeneous spillovers to emerging market interest rates and sovereign bond conditions.

Policymakers in emerging markets should monitor U.S. employment and economic-activity news, as these have the largest spillover effects.
During pandemic-related developments (for example, news about vaccines), emerging markets face additional sensitivity to U.S. news.
Monetary policy responses in the United States do not fully account for all spillovers; thus, emerging market policymakers need to consider direct news-driven channels and investor risk sentiment when assessing external risks.