WHAT PROTECT EMERGING MARKETS FROM DEVELOPED COUNTRIES UNCONVENTIONAL MONETARY POLICY SPILLOVER?

Abstract

This paper investigates the macro-characteristics that reduce the spillover effect of unconventional monetary policy (UMP) from developed countries to the emerging market ones. We use event study method to examine 24 UMP announcements and a panel fixed effects model to examine the characteristics of the emerging markets. The spillover channel considered in this paper is the exchange rate. The results show inconclusiveness of the macroeconomic fundamentals role on emerging markets’ currency resilience. From three main fundamental economic indicators, only inflation was found to significantly and positively contribute to exchange rate depreciation. Deeper financial markets contribute to better resilience. Trade linkages with China provide less vulnerable currency position of the emerging markets while trade linkages with developed countries provide mixed evidence. The macro-prudential policy and the capital flow measures that the emerging markets countries implemented before to the announcements are moderately effective on reducing the spillover effect.