US monetary policy and business cycles in developing countries

The article examines modeling the impact of news shocks of US monetary policy on developing countries. The study analyzes the transmission mechanism of the Federal Reserve's interest rate news shock. The authors argue that the volatility of macroeconomic indicators in emerging economies can be explained by changes in monetary policy in other countries, and highlight the main channels of influence: financial sector indicators and trade indicators. In this paper the authors first use the LSDV-estimator of the panel vector autoregression and identify unexpected and news shocks. To achieve this goal, quarterly data was collected from the first quarter of 1998 to the third quarter of 2017 for Russia, along with data starting from the first quarter of 1995 for several developing countries. The results obtained indicate that the expected tightening of US monetary policy leads to a decrease in output, investment, and weakening of exchange rate in Russia. The monetary news regarding an increase in the US Federal Reserve's interest rate in two quarters also results in a short-term increase in trade balance and interest rates. News about future economic developments affects macroeconomic indicators up to two quarters before the implementation of monetary policy changes. Additionally, the news shock accounts for up to 11% of the variation in macroeconomic indicators in Russia. Accordingly, the monetary policy news shock is found to be as significant as an unexpected shock. The paper concludes with the analysis of the role played by various financial and trade channels.