NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Federal Reserve, Emerging Markets, and Capital Controls: A High Frequency Empirical Investigation

Sebastian Edwards

NBER Working Paper No. 18557
Issued in November 2012
NBER Program(s):   DEV   IFM   ME

In this paper I use weekly data from seven emerging nations - four in Latin America and three in Asia - to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s. The results suggest that there is indeed an interest rates "pass through" from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different - in terms of impact, steady state effect, and dynamics - in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a "twist" policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.

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Document Object Identifier (DOI): 10.3386/w18557

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