Working papers

Spillover through Sovereign Risk: U.S. Monetary Policy and Emerging Economies [Job Market Paper] 


In this paper, I investigate how sovereign risk in emerging economies amplifies U.S. monetary policy spillovers. Empirically, U.S. monetary tightening increases global emerging countries' sovereign yield spreads. High sovereign-risk countries experience a more significant spillover impact on their macroeconomic variables compared to low-risk countries. This observation illustrates an "amplification effect" of sovereign risk in transmitting U.S. monetary policy. I reconcile the findings in a two-country model featuring financial frictions and defaultable sovereign bonds. U.S. monetary policy tightening elevates the risk of default for emerging countries' governments through pressure on the debt burden. The subsequent government bond devaluation and reduced lending, combined with changes in global financiers' portfolio choices, amplify the conventional spillover effect of U.S. monetary policy by driving up interest rates in emerging countries.

Sovereign Risk Premium, Bond Liquidity and Foreign Reserve Accumulation


This paper analyses how foreign reserve accumulation affects sovereign credit risk. By using sovereign credit default swap (CDS) spread to measure sovereign risk, I use the credit rating method to decompose the CDS spread into the default premium component, which represents the possibility of default, and the risk premium component, which represents the price paid to the investors for bearing the default risk. Using panel regression analysis, I show that foreign reserve accumulation can effectively reduce the CDS spread, mainly through the risk premium component. At the same time, it has no significant effect on the default premium component. By analyzing bond-level data, foreign reserve accumulation can effectively reduce the spillover effect of global financial volatility to sovereign credit risk. Also, holding more foreign reserves can improve the liquidity condition of the sovereign bonds a country issues. 

U.S. Unconventional Monetary Policy Spillover and EME Vulnerability 

This paper develops a structural two-country DSGE model to study the spillover of both conventional and unconventional monetary policies from advanced economies to Emerging Market Economies (EMEs). I contrast the effects of conventional monetary policy, forward guidance, and quantitative easing (QE). The model reveals that both conventional and unconventional expansionary monetary policies tend to decrease asset prices while simultaneously boosting output and inflation. In contrast, QE has a comparatively mild impact on exchange rates and exerts opposing effects on capital outflows in comparison to the other policies. Additionally, I explore the optimal foreign exchange rate regime from the perspective of EME countries to minimize their vulnerability to spillover effects. My analysis highlights that under an exchange rate peg, EME nations are more significantly influenced by monetary policy spillovers from advanced economies. However, the implementation of capital controls emerges as an effective strategy for mitigating the vulnerabilities arising from foreign monetary policy spillovers.

Work in progress

Quantifying Multilateral Spillovers from Foreign Exchange Intervention,
with Julia Faltemier, IMF working project


This paper explores the direction and size of multilateral spillovers from Foreign exchange intervention (FXI). The conceptual and quantitative Integrated Policy Framework (IPF) models by IMF mainly focus on the optimal policy problem from the perspective of a small open economy, however, the use of FXI in a large economy could create important multilateral spillovers. In an integrated global capital market, FXI can alter the balance sheet constraints of global financiers, creating spillovers between markets. Building on a comprehensive panel dataset of FXI across countries, we estimate the impact of FXI abroad on the exchange rate and UIP premia. Current results suggest that FX purchases abroad lead to an economically significant domestic appreciation.