The Cross-border Transmission Mechanism Of U.S. Monetary Policy To Emerging Market Economies

Since 2020,with the continuous spread of the global epidemic situation,the Federal Reserve has restarted the quantitative easing policy,resulting in abundant global liquidity.With the deepening of global financial integration,the influence of U.S.monetary policy on emerging market countries has gradually emerged.Emerging economies are even more affected than developed economies after unconventional monetary policies are implemented in developed economies.In this context,how emerging market countries respond to U.S.monetary policy has become the focus of academic attention,and how to respond to the capital flow shock caused by U.S.monetary policy is a major challenge facing emerging economies.There has been intense academic discussion on the spillover effects of U.S.monetary policy on emerging market countries,and some consensus has been reached on a number of important issues.Most of the existing studies focus on the impact on the macro-level economic,financial and monetary policies of emerging market countries,as well as the role of heterogeneity at the level of national characteristics,while there are few related studies on how the U.S.monetary policy affects the micro-level.In addition,although there have been many literatures discussing the influence channels of U.S.monetary policy,most of them are based on a macro perspective,and there are few studies at the micro level.Under the major strategic deployment of the Fifth Plenary Session of the 19 th Central Committee of the Communist Party of China,"Accelerating the construction of a new development pattern with domestic circulation as the main body and domestic and international dual circulation promoting each other",the U.S.monetary policy is regarded as a global impact to explore its impact on China,from Clarifying channels at the micro level and putting forward corresponding policy recommendations is one of the important tasks for China to improve macro-control and achieve high-quality economic development.Therefore,this paper uses micro-level fund data and corporate data to focus on the impact and cross-border transmission of U.S.monetary policy on emerging market countries from a micro perspective.This article mainly focuses on the impact of U.S.monetary policy on the micro-level of emerging market economies.U.S.monetary policy will first affect the cross-border capital flows of emerging market economies through various channels,and then affect enterprises in emerging market economies through cross-border capital flows.Following the above logic,this paper successively selects the capital flow of cross-border equity funds and enterprises in emerging market economies as the research objects.The main research content of this paper is to take U.S.monetary policy as the core explanatory variable and propose two new micro-level channels for the impact of U.S.monetary policy on emerging market economies:the global investor sentiment channel and the FDI corporate trade credit channel.Then,by examining the impact of US monetary policy on the investment efficiency of emerging market economies,the discovered macro-level channels are extended to the micro-level,and the existence of each channel is systematically explored.The irrational factor in the global financial market may provide a new channel for the transmission of U.S.monetary policy shocks.Based on the cross-border fund-level capital flow data provided by EPFR,we find there is a significant negative correlation between U.S.monetary policy shocks and cross-border fund flows in emerging market countries,that is,loose U.S.monetary policy will increase cross-border funds inflows in emerging market countries.Further research shows that the transmission of U.S.monetary policy shocks is at least partly achieved through the mediating effect of investor sentiment.After decomposing investor sentiment into global investor sentiment and local investor sentiment,we found that global investor sentiment is the intermediary indicator,rather than local investor sentiment.Heterogeneity analysis shows this channel has a greater impact on passive funds,ETF,and funds issued by the world’s top five issuers,and has a greater impact on countries with more open capital accounts,less exchange rate flexibility,and higher levels of financial development.The research in this article provides a new perspective for understanding the spillover effects of U.S.monetary policy.Therefore,emerging market countries need to pay attention to changes in global investor sentiment.The literature has found that for all types of capital flows,U.S.monetary policy has the least impact on FDI.Therefore,FDI has received less attention when discussing the spillover effects of U.S.monetary policy on emerging market countries.Although U.S.monetary policy has less of an impact on FDI,FDI may play an important role in the international transmission of U.S.monetary policy.When there is sufficient liquidity in the international capital market,FDI companies often act as liquidity providers,passing the liquidity through trade credit to local companies in host countries with limited credit.The U.S.monetary policy is an important source of international liquidity shocks.Therefore,the presence of FDI firms may create new channels for the transmission of U.S.monetary policy shocks.When the U.S.monetary policy changes,FDI companies located in emerging market countries can use their own advantages to raise funds in the international capital market,and transfer liquidity to local companies in emerging market countries through trade credit supply.Based on the firm-level data in emerging market countries provided by Osiris,we find that the U.S.monetary policy has a negative impact on the trade credit supply of FDI companies in emerging market countries and then affects the liquidity of local companies in the host country due to the financing advantages of FDI companies,and this impact is more pronounced for firms with less financing constraints and for firms whose parent companies are located in developed countries.Country heterogeneity analysis shows that the impact is greater in the host countries with more open capital accounts,less flexible exchange rates and higher levels of financial development.Further research shows that U.S.monetary policy eventually has an influence on the financial situation of the local firms in the host country by affecting the trade credit of FDI firms,and this channel has a greater impact on local companies which have a smaller scale and sectors that are highly dependent on external financing.Moreover,in this channel,the macro-prudential policies implemented by the host country are ineffective.Only capital controls can effectively weaken the influence,while foreign exchange intervention will amplify this impact.A large number of literatures have proved that the impact of U.S.monetary policy will have obvious spillover effects on emerging market economies,and the loose monetary policy of the United States can promote investment in emerging market countries.However,an increase in investment scale does not necessarily lead to an increase in investment efficiency.my country’s economic development and economic and trade investment are gradually transforming from quantitative growth to qualitative growth,and it is required to move forward from the previous investment model based on quantity to efficient investment and effective growth.Improving investment efficiency is a necessary and important part of improving investment quality.Will the loose U.S.monetary policy’s role in promoting corporate investment in emerging market countries alleviate the lack of corporate investment and increase the efficiency of corporate investment? Or will enterprises over-invest and reduce investment efficiency? What determines the impact of U.S.monetary policy on the investment efficiency of enterprises in emerging market countries? How should emerging market countries respond? Based on the corporate-level data of listed companies provided by Osiris,this paper finds that loose U.S.monetary policy will lead to over-investment and reduced investment efficiency of enterprises in emerging market countries,while tight U.S.monetary policy will alleviate the degree of over-investment of enterprises in emerging market countries,and even make enterprises invest in emerging market countries.insufficient.The channel test results show that the U.S.monetary policy will affect emerging market countries through trade channels and financial channels,and financial channels are dominant,and financial channels are mainly affected by credit channels,interest rate channels and balance sheet channels,and asset price channels have an impact.The effect is not significant.The results of the firm-level heterogeneity test show that,at the firm-level,larger and more leveraged firms are less affected by U.S.monetary policy on over-investment.The country-level heterogeneity test results show that the over-investment of enterprises in countries with a higher degree of capital account openness,higher national interest rate spreads,and higher financial development is more affected.Emerging market countries often use regulatory measures to counter spillovers from U.S.monetary policy.Explore the effectiveness of macro-prudential policies,capital controls and foreign exchange interventions,and find that macro-prudential policies and capital controls can,to a certain extent,weaken the impact of U.S.monetary policy on over-investment by companies in emerging market countries,while foreign exchange interventions can amplify U.S.The impact of monetary policy on corporate underinvestment in emerging market countries.Therefore,policymakers should pay close attention to changes in U.S.monetary policy to guard against related risks.Since countries with more open capital accounts are more affected by the impact of U.S.monetary policy,capital account opening in emerging market countries should be carried out gradually,paying attention to the risk impact brought by the opening of financial markets.In addition,the development of global financial integration enables U.S.monetary policy shocks to spread to financial markets in other countries through global investor sentiment.Policy makers should not only pay attention to macroeconomic indicators,but also pay close attention to changes in global investor sentiment and establish relevant monitoring indicators and systems.Finally,while emerging market countries are actively introducing FDI,they should also pay more attention to the negative impact of FDI capital inflows,and pay close attention to the behavior of FDI companies when the U.S.monetary policy changes.