The Impact Of U.S. Monetary Policy On Capital Flows To Emerging Market Economies

The United States,Japan,Britain and the other developed economies took “quantitative easing”(QE)monetary policy to stimulate economic growth and employment after international financial crisis since 2008.Excess liquidity flooded into emerging market economies(EMEs),which made these countries exposure to external shocks.When the Fed is exiting the QE and returning to conventional monetary policy,the international liquidity is shrinking,and whether the emerging market economies will face up consequences of the reversal capital flow,which has attracted concentration of international academics.This study aims to determine the linkages and transmission mechanisms between U.S.monetary policy and capital flows of EMEs.VARX models is introduced to observe 10 emerging markets in G20,which have close economic relationships with U.S.A.This analysis shows that the closer currency links,the stronger volatility of short-term capital flows.The exchange rate volatility also has the same trend of fluctuation as global risk factors.The empirical results indicate that the U.S.monetary policy lead portfolio equity and debt flowing into EMEs,but it has a negative impact on foreign direct investment.These results differ slightly from different exchange regimes and effects of U.S.monetary shock are more significant for the fixed exchange-rate regime than other regimes.Another important finding is that EMEs are fragile to external shocks and even more vulnerable to global risk factors.However,it also shows that monetary policy is the driven variable of the global risk which determines capital flows to EMEs.The EMEs should be keen on spillover effect of U.S.monetary policy adjustment.