Among the factors behind international spillovers, U.S. monetary policy developments retain a major influence. Such developments drive the global financial cycle as strongly demonstrated by Rey (2013), Miranda-Agrippino and Rey (2020), Miranda-Agrippino and Rey (2021). The dramatic U.S. monetary easing during the early months of the Covid-19 pandemic was the single most important factor for the reversal of capital outflows to emerging markets and developing economies.1 As shown by Kalemli-Özcan (2019), the transmission mechanism for monetary policy spillovers to emerging market economies (EMEs) rests on the effect of U.S. monetary policy on investors’ risk sentiments, as those sentiments are more volatile in the case of EMEs. In Kalemli-Özcan (2019), I show that capital flows to emerging markets are particularly “risk-sensitive.” This creates a challenge unique to the EME policymakers and their monetary policy frameworks.

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