Are higher U.S. interest rates always bad news for emerging markets?

Increases in U.S. interest rates are often thought to generate adverse spillovers to emerging market economies (EMEs). We show that whether U.S. rate hikes are bad news for EMEs depends on the source of these hikes. Higher rates stemming from stronger U.S. growth generate only modest spillovers to EME financial markets, while those stemming from hawkish Fed policy or inflationary pressures are much more disruptive. We identify the sources of U.S. rate changes using moves in financial asset prices around FOMC announcements and U.S. employment reports. Drawing on the literature identifying Fed “information” effects, we interpret positive comovements of Treasury yields and U.S. equity prices around these events as growth shocks and negative comovements as monetary shocks, and estimate the effect of these shocks on emerging market asset prices. For EMEs with greater macroeconomic and financial vulnerabilities, the difference between the impact of monetary and growth shocks is magnified.