This paper examines the effects of US monetary policy on emerging market economies. Using a linear VAR with high-frequency identification, it finds that a monetary policy tightening results in a depreciation of the real exchange rate, a decline in the stock market, and an increase in sovereign spreads. To investigate the presence of non-linear effects at different stages of the global financial cycle, it employs IVAR and STVAR models, providing empirical evidence that emerging market economies are more vulnerable during periods of financial stress.
Capital flows can have destabilizing effects in economies connected to the global financial system. Research has shown that external factors tend to explain most of these movements during episodes of financial turmoil, while country-specific determinants are able to explain heterogeneity throughout the recovery. This paper seeks to understand how reserve accumulations affect real and financial variables. For this purpose, a theoretical framework based on an extended version of the Mundell-Fleming model is presented and its predictions are tested with empirical evidence. Our results suggest that, under a flexible exchange rate regime, an accumulation of reserves generates net capital inflows with limited effects on the real economy. Specifically, we find that an accumulation of reserves of 1% of GDP would increase net capital flows about 0.81%.