International monetary spillovers and macroeconomic stability in developing countries

Abstract

This paper analyses the impact of international spillovers on macroeconomic stability in developing countries. Specifically, the study investigates the impact of United States (US) monetary policy spillovers in the form of US inflation and Federal funds interest rate on Uganda and Kenya's inflation rates, interest rates and the exchange rates, key macroeconomic indicators of importance to macroeconomic stability. The focus on international spillovers from the USA is due to the dominant role it plays in determining global economic conditions. The study applies the Generalized Vector Autoregressive (GVAR) approach to quantify spillovers across these economies. The results shows that despite recent efforts towards East African regional integration, international spillovers from global economies like the US are more significant in determining macroeconomic stability in developing countries, underscoring the importance of global policy coordination. Specifically, we find an amplification of return and volatility spillovers after the onset of the Global financial crisis.

Keywords

• international spillovers
• inflation
• exchange rates
• volatility spillovers