Testing of leader-follower interaction between fed and emerging countries’ central banks Metin Teti _ k Us ¸ak University, School of Applied Science, Us ¸ak, Turkey ARTICLE INFO JEL classification: E52 C70 C57 Keywords: Monetary policies Game theory Asymmetric causality test ABSTRACT This study aims to investigate the structure of the leader-follower mechanism between policy decisions of central banks of emerging countries (Indonesia, Israel, South Korea, Thailand, and Turkey, henceforth ECCB) and Fed policy decisions. To determine whether a systematic leader- follower relationship between the ECCB and the Fed exists, policy decisions (interest rates) of the Fed and the ECCB was examined first. In this context, the direction of the causal relation between the policy decisions of Fed and ECCB was discussed and the Hatemi-J asymmetric cau- sality test was applied. According to the test results, while there is no evidence of symmetrical and asymmetrical causality from ECCB policy rates to Fed policy rate, some findings of symmetrical and asymmetrical causality from Fed policy rate to ECCB policy rates is reached. As a result of these findings, we see that some central banks within the ECCB follow Fed policy decisions. However, these follower strategies are closely related to Fed’s contractionary or expansionary stance. 1. Introduction It can be said that the central banks of emerging countries (ECCB) are reasonable in the sense that they consider policy decisions of the Fed when determining their own policy decisions. Belke and Gros (2005) put forward some intuitive and logical reasons for this. One reason is that other central banks see Fed’s policy decisions as an important signal about American economy and financial markets and determine policy decisions accordingly. Another reason is business cycle. For example, if the US cycle precedes the cycle of the Eurozone at a given time, the European Central Bank (ECB) might appear to be following the Fed at that time. It is noted that the problem at this point is leads and lags of some macroeconomic variables are usually measured in months or quarters (Begg et al., 2002). Schroeder, 2002 state that the impact of the US business cycle has been significantly weakened by the emergence of multinational firms that remain loyal to long-term strategies independent of business cycle troughs. Therefore, it is claimed that it would be misleading to consider business cycle related issues as an indicator for the existence of “leader-follower” dynamic. Belke et al. (2002) and Wyplosz, 2001 assert that Fed’s position as leading policymaker is mostly caused by the fact that Fed’s leadership and its policies implemented in case of global economic and financial shocks are clever and swift. In this context, the answer to the question of whether the ECCB policy decisions follow Fed policy decisions also becomes substantial. Moreover, if such a leader-follower mechanism exists, it becomes significant that ECCB adopt a follower strategy. In the case of a leader- follower mechanism, it is considered that this structure needs to be constructed and tested separately. As a result, the contribution of this study can be summarised as follows. First, the study evaluates the interaction between the Fed and ECCB in theoretical framework of the game theory. Secondly, in order to investigate the leader-follower structure between the Fed and E-mail address: metin.tetik@usak.edu.tr. Contents lists available at ScienceDirect The Journal of Economic Asymmetries journal homepage: www.elsevier.com/locate/jeca https://doi.org/10.1016/j.jeca.2020.e00181 Received 6 July 2020; Received in revised form 13 August 2020; Accepted 14 August 2020 1703-4949/© 2020 Elsevier B.V. All rights reserved. The Journal of Economic Asymmetries 22 (2020) e00181