IMF Working Papers

Emerging markets have shown remarkable resilience during risk-off episodes in recent years. While favorable external conditions—good luck—contributed to this resilience, improvements in
policy frameworks—good policies—played a critical role in bolstering the capacity of emerging markets to withstand the adverse consequences of these events. Improvements in monetary policy implementation and credibility have reduced reliance on foreign exchange (FX) interventions and capital flow management measures, and stricter macroprudential regulation also contributed
to less FX interventions. Also, central banks have become less sensitive to fiscal interference and hold sway over domestic borrowing conditions. Looking ahead, countries with robust frameworks face easier policy trade-offs and are better positioned to navigate risk-off episodes. In contrast, economies with weaker frameworks risk de-anchoring inflation expectations and larger output losses if monetary tightening is delayed, especially when persistent price pressures emerge. In these settings, FX interventions offer only temporary relief and are less necessary when policy frameworks are sound.