Monetary Policy Transmission in Emerging Markets and Developing Economies

By Luis Brandão-Marques, Gaston Gelos, Thomas Harjes, Ratna Sahay, Yi Xue

February 21, 2020

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Luis Brandão-Marques, Gaston Gelos, Thomas Harjes, Ratna Sahay, and Yi Xue. Monetary Policy Transmission in Emerging Markets and Developing Economies, (USA: International Monetary Fund, 2020) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.

Subject: 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: 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

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/035
Stock No:

WPIEA2020035
ISBN:

9781513529738
ISSN:

1018-5941

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