Spillover Effects of Federal Reserve Conventional and Unconventional Monetary Policies on Latin American Equity Prices, 2000-2020

Abstract

This paper investigates the international effects of Federal Reserve monetary policies, commonly known as “spillover effects,” on Latin American equity prices from 2000-2020. Its contributions to academic literature are threefold. First, it focuses specifically on Latin American markets due to their close geographic, economic, and financial ties to the United States. Existing studies have shown that similar linkages between other central banks and emerging market regions have resulted in strong spillover effects on the emerging markets’ asset prices. Second, it examines the spillover effects from Federal Reserve financial lending facilities established in response to the 2007 Great Financial Crisis. Third, it incorporates country-specific risk variables in its analysis. To address how Federal Reserve policies affected Latin American equity markets, this paper employs a fixed effects, panel event study methodology. The main finding is that market underestimations of Federal Reserve interest rate changes resulted in higher Latin American equity prices prior to the Great Financial Crisis, but led to lower equity prices after the crisis. Additionally, this paper found that Federal Reserve unconventional policies established during the Great Financial Crisis had no impact on Latin American equity markets.