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):Development Economics, International Finance and Macroeconomics, Monetary Economics

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

Published: The Federal Reserve, the Emerging Markets, and Capital Controls: A High-Frequency Empirical Investigation SEBASTIAN EDWARDS Article first published online: 18 DEC 2012 DOI: 10.1111/j.1538-4616.2012.00556.x © 2012 The Ohio State University Issue Journal of Money, Credit and Banking Journal of Money, Credit and Banking Volume 44, Issue Supplement s2, pages 151–184, December 2012

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