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Abstract
e Policy Research Working Paper Series disseminates the ndings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the ndings out quickly, even if the presentations are less than fully polished. e papers carry the
names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this paper are entirely those
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P R W P 10582
Emerging markets and developing economies (EMDEs)
exhibit signicantly greater volatility in asset returns than
advanced economies. e commonalities in these returns
(and ows) across countries are particularly strong for
EMDEs. If these occur independently of the exchange
rate regime and if these global nancial cycle eects are
furthermore independent of countries’ nancial openness,
the result is Obstfeld (2022)’s “Lemma”: countries can do
nothing to decouple from the global nancial cycle. Under
the prevalent view that U.S. monetary policy is the key
driver of the global nancial cycle, countries then inherit
U.S. monetary policy no matter what they do on exchange
rates or capital control policies. Using structural vector
autoregression models for 78 countries over 1995–2019,
as well as dierent methods of identifying U.S. monetary
policy shocks from the literature, this paper tests the propo-
sition that countries with less open capital accounts exhibit
systematically smaller responses to U.S. monetary policy
shocks than low capital control countries. is paper also
considers the role of other institutional features such as
exchange rate regimes and foreign exchange interventions
in explaining cross-country dierences in the responses to
the shocks. e empirical results suggest that more stringent
capital controls exhibit smaller responses of interest rates
and exchange rates to U.S. monetary policy shocks and that
this result holds more rmly for EMDEs than advanced
economies. In contrast, the analysis nds only weak evi-
dence that the degree of exchange rate exibility aects
U.S. spillovers to foreign interest rates and exchange rates.
is paper is a product of the Prospects Group, Development Economics. It is part of a larger eort by the World Bank to
provide open access to its research and make a contribution to development policy discussions around the world. Policy
Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. e authors may be contacted
at jongrimha@worldbank.org.
