Asymmetric Spillovers in Emerging Market Monetary Policy

Is the average impact of US short term rates on EM monetary policy independent of the direction of US monetary policy movement? Building on a variety of estimation techniques, we evaluate the relationship between US short term rates and EM monetary policy under alternative US monetary cycles. We rely on a panel of 21 countries with inflation targets and broadly flexible exchange rate regimes for the period between 2001 and 2019. Contrary to current literatures, we find that US monetary policy spillovers are larger in periods of rate reduction. The asymmetric impact of US rates cannot be explained by other drivers, such as income per capita, current account, fiscal debt and the direction of the exchange rate movement