Impact of U.S. Monetary Policy on Bond Spreads in Emerging Market Economies: A Comprehensive Analysis

Abstract: This paper examines the impact of U.S. monetary policy on sovereign bond spreads in emerging market economies under the period of Unconventional Monetary Policy (UMP). Applying a Fixed effects and Pooled Mean Group method on monthly data from 2009-2020 it shows evidence that changes in spreads can be attributed to an elevated probability of emerging markets being unable to repay loans, arising from shifts in liquidity conditions resulting from monetary policy actions implemented in the U.S. The results are heterogenous across different economies, contingent upon their unique macroeconomic and financial characteristics. It is imperative for central banks to consider these characteristics when formulating and implementing UMP to attain the desired outcomes and address specific challenges in each context.