When Policy Bites: State-Dependent Monetary Policy Transmission in Emerging Markets

IMF Working Papers, May 15, 2026

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Study documents state-dependence of monetary policy transmission to output and core consumer prices in a sample of eleven large inflation-targeting emerging markets.
Monetary policy has strong effects on output:
- During recessions.
- After a period of loose monetary policy.
Monetary policy has little to no impact on output:
- During expansions.
- When monetary policy has been tight.
Response of prices is muted regardless of:
- Business cycle position.
- Monetary policy stance.
Transmission depends on trend inflation:
- When trend inflation is low, monetary policy has a stronger impact on output and a weaker effect on prices.
- When trend inflation is high, output response is dampened and price adjustments are amplified.

Findings are broadly consistent with the presence of:
- Financial frictions in the form of occasionally binding borrowing constraints.
- Endogenous frequency of price adjustments.
- Loss aversion preferences.
- A convex Phillips Curve.

Monetary policy effectiveness on output is state-dependent; levers are more potent in recessions and following loose policy episodes.
Price responses are relatively muted across business cycle and policy stance states, suggesting limited near-term inflationary sensitivity except when trend inflation is high.
Consideration of trend inflation regimes is important for calibrating expected trade-offs between output stabilization and price stability.