Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324803 
Year of Publication: 
2025
Series/Report no.: 
AEI Economics Working Paper Series No. 2025-05
Publisher: 
American Enterprise Institute (AEI), Washington, DC
Abstract: 
The steep rise in US interest rates that started in 2022 led many observers to anticipate severe difficulties for emerging market economies (EMEs). Unlike after the Volcker disinflation of the early 1980s or the bond market turmoil of 1994, however, most EMEs weathered the Fed's monetary tightening in 2022-23 relatively well. In particular, EME dollar credit spreads, an indicator of potential financial distress, rose only moderately in those years before dropping to historically low levels in 2024. To explain these developments, we estimate monthly regressions of EME spreads over the period 2006-2024 on measures of US monetary policy as well as US financial conditions: the VIX volatility index, the foreign exchange value of the dollar, and US corporate high-yield spreads. Following Hoek et al. (2022) and Arteta et al. (2022), we find that "monetary shocks"-increases in US Treasury yields prompted by concerns about rising inflation or hawkish Fed behavior-boost EME spreads, as expected. However, those monetary shocks account for almost none of the variation in spreads in the 1½ decades leading up to the COVID-19 pandemic and contribute only moderately to the rise in spreads in 2022-23. Thus, one reason that the EMEs weathered Fed tightening so well is that, simply put, Fed tightening is no longer as injurious to them as commonly believed; this likely reflects improvements in EME policies since the 1980s and 1990s that have bolstered their resilience. A second reason why EME spreads remained relatively contained in the face of rising interest rates is that US corporate credit markets remained buoyant, and their confidence spilled over to EMEs. We show that US high-yield spreads accounted for the lion's share of the fluctuations in EME spreads over the past couple of decades, dominating not only the effects of monetary shocks but also changes in the VIX and the dollar.
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.