Dear Colleagues,
The
ongoing tightening of U.S. monetary policy has significant implications
for emerging market and developing economies (EMDEs).
To inform
the recent debates on these implications, we have just released a new
study: How
Do Rising U.S. Interest Rates Affect Emerging and Developing Economies? It Depends (by Carlos Arteta, Steven Kamin, and Franz Ulrich Ruch).
The impact of rising U.S. interest rates depends on the types of shocks that drive them.
Our new study
classifies movements in U.S. interest rates into those caused by three
distinct shocks to: inflation expectations (“inflation” shocks),
perceptions of the Federal Reserve’s reaction function (“reaction”
shocks), and real activity (“real” shocks).
It attributes
this year’s sharp increases in U.S. interest rates almost exclusively to
inflation and reaction shocks.
These types of shocks lead to tighter
financial conditions and lower consumption and investment in EMDEs.
Rising U.S. interest rates driven by reaction shocks
are also more likely to push EMDEs into financial crisis.
By comparison,
higher U.S. interest rates stemming from real shocks are associated
with benign outcomes for EMDE financial conditions.
Please
do forward this message to those who might be interested in this topic.
Thank you for your interest in our products. As always,
we welcome your comments.
Best, Ayhan
PS: The new study builds on our recent work on:
Is
a Global Recession Imminent?; Global Stagflation;
From Low to High Inflation; Global
Recessions; Inflation During Global Recessions; Implications
of the War in Ukraine for the Global Economy; and A Decade After the Global Recession.
You
can visit Global Economic Prospects and Commodity
Markets Outlook for our main periodical products and World Bank Economic Monitoring for our full menu of publications.
M. Ayhan Kose
Chief Economist and Director of Prospects Group
Equitable Growth, Finance and Institutions
World Bank Group
T +1 (202) 473-8350
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