Did the Unconventional Monetary Policy of the U.S. Hurt Emerging Markets?

Policymakers in emerging markets complained that the unconventional US monetary policy response to the Great Recession hurt their economies. US policymakers responded that the policy was geared toward conditions in the US, and that a strong US economy benefited everyone. Here we evaluate these claims in a two country model of the US and an emerging market country, bombarded by shocks to the net worth of US banks. Our model allows us to calculate a “passive equilibrium” in which US monetary policy does not respond to the shock in any way. Then, we calculate a “self oriented” equilibrium in which quantitative easing is set optimally to maximize US welfare, and a “cooperative” equilibrium in which quantitative easing and the monetary policy in the emerging market country are set to maximize joint welfare. Comparing welfare in these equilibria, we find that the self oriented US monetary policy benefits both countries, and that cooperation brings little further improvements in welfare.