Abstract: This paper identifies anticipated (news) and unanticipated (surprise) shocks to the U.S. Fed Funds rate using Fed Funds futures contracts, and assesses their propagation to emerging economies. Anticipated shocks are identified as the expected change in the Fed Funds rate orthogonal to expected U.S. business cycle conditions while unanticipated shocks are the one-step ahead forecast error. Anticipated shocks explain around half of the narrative series of U.S. monetary policy shocks. To identify the effects of both shocks, I estimate a Panel VAR using a sample of emerging economies. An anticipated 25 basis points contractionary U.S. interest rate shock induces a fall of 0.5% in GDP from its trend two quarters before the shock materializes. Both anticipated and unanticipated changes in the U.S. interest rate cause significant and quantitatively similar effects. The increase of the U.S. BAA corporate spread in response to both shocks significantly exacerbates the response of emerging economies. After accounting for anticipation, U.S. interest rate shocks explain 14% of business cycle fluctuations in emerging economies.
Keywords: U.S. interest rate, International business cycles, News shocks, Emerging economies