Emerging markets reacted differently to the U.S. monetary tightening that began in 2022, according to a Federal Reserve study. The Fed’s analysis, which uses a two‑country New Keynesian model, found that EMEs with higher vulnerability indices—those with weaker fiscal balances, lower reserves, and higher debt—performed better in both financial markets and real growth than the model predicted. In contrast, less vulnerable economies experienced financial outcomes better than expected but saw real GDP growth below the model’s estimates. The study attributes the divergence to a mix of growth‑driven and monetary‑driven U.S. policy shocks and suggests that factors outside the United States, such as commodity prices and China’s growth prospects, may have moderated the impact.
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