Monetary Policy Transmission in Emerging Markets and Developing Economies
IMF Working Papers, February 21, 2020
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- Monetary Policy Transmission in Emerging Markets and Developing Economies
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Bibliographic details
- Authors: Luis Brandao Marques, Gaston Gelos, Thomas Harjes, Ratna Sahay, Yi Xue
- Published: February 21, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513529738.001
Summary findings
- Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT).
- Interest rate hikes reduce output growth and inflation once the behavior of the exchange rate is explicitly accounted for.
- Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
- The analysis covers 40 EMDEs using Jordà’s (2005) approach.
Methodology and scope
- Empirical approach: Jordà’s (2005) approach applied to 40 EMDEs.
- Focus: Transmission from interest rates to inflation and output, with explicit accounting for exchange rate behavior.
- Subjects listed: Central bank policy rate, Consumer price indexes, Exchange rates, Financial markets, Financial sector development, Financial services, Foreign exchange, Monetary policy, Monetary policy frameworks, Prices.
- Keywords include: Africa, Central bank policy rate, Consumer price indexes, dummy variable, Emerging markets, exchange rate, exchange rate channel, Exchange rates, Financial sector development, Financial structure, Global, inflation targeting, interest rate, interest rate shock, interest-rate-based monetary policy, IT framework, Monetary Policy, monetary policy channel, monetary policy framework, Monetary policy frameworks, monetary policy rate, monetary policy shock, monetary policy transmission, nominal exchange rate, reaction function, transmission mechanism, unit monetary policy shock, WP.
Policy implications and interpretation
- Modern monetary policy frameworks (inflation targeting, independent and transparent central banks) strengthen monetary policy transmission in EMDEs.
- Financial development is less decisive for transmission strength than the presence of modern frameworks.
- Accounting for exchange rate dynamics is essential to correctly estimate the impact of interest rate changes on inflation and output.
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- Working Paper