Capital Flows to Emerging Economies and Us Monetary Policy – (Case Latin America)

Proceedings of The 5th World Conference on Management, Business and Economics

Year: 2023



Capital Flows to Emerging Economies and Us Monetary Policy – (Case Latin America)

Wójcik-Czerniawska Agnieszka, Phd, Mba



Many developing market economies are recipients of significant loans from international banks, and these loans are typically denominated in American dollars. Consequently, we can say that the monetary policy in the United States has an effect on credit cycles in EMEs. Since local EME lenders cannot match the volume of capital flowing into the region from international banks, U.S. monetary policy has an impact on the amount of credit available to EME nations. We demonstrate that the spillover has a greater effect on markets with higher yields and greater financial openness, as well as on firms that rely heavily on borrowing from foreign banks. (Falk Bräuninga, 2020) By using an event study approach, we examine the role that shock sources and the role that risks play in the transmission of monetary changes from the U.S to economies in emerging markets. There is a significant distinction between the impact of unconventional monetary policy in the United States on emerging markets, the reaction of asset values in developing economies to shocks in US monetary policy, and so on. Moreover, we simulate fundamentally the most significant vulnerabilities. Higher US interest rates, produced by stronger US aggregate demand, are beneficial to the economic activities of EMEs with stronger fundamentals, but can be damaging to the economic activity of EMEs with worse fundamentals. A more hawkish policy stance in the United States, which leads to monetary tightening, has the opposite effect, significantly slowing down activity across all EMEs.   In this paper, we demonstrate that the benefits of such trade-offs are enhanced when inflation expectations are well-anchored. (Ahmed S. O., 2021)

keywords: capital, Flow, emerging market, monetary policy, EMEc