Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets

26 Pages Posted: 22 Jun 2012

See all articles by Carlos A. Vegh

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)

Guillermo Vuletin

Brookings Institution

Date Written: June 2012

Abstract

Developing countries have typically pursued procyclical macroeconomic policies, which tend to amplify the underlying business cycle (the "when-it-rains-it-pours" phenomenon). There is, however, evidence to suggest that about a third of developing countries have shifted from procyclical to countercyclical fiscal policy over the last decade. We show that the same is true of monetary policy: around 35 percent of developing countries have become countercyclical over the last decade. We provide evidence that links procyclical monetary policy in developing countries to what we refer as the "fear of free falling;" that is, the need to raise interest rates in bad times to defend the domestic currency.

Suggested Citation

Vegh, Carlos A. and Vuletin, Guillermo, Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets (June 2012). NBER Working Paper No. w18175, Available at SSRN: https://ssrn.com/abstract=2089247

Carlos A. Vegh (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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Washington, DC 20036-1984
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University of Maryland - Department of Economics ( email )

College Park, MD 20742
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University of California at Los Angeles ( email )

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310-825-7371 (Phone)
310-825-9528 (Fax)

HOME PAGE: http://vegh.sscnet.ucla.edu

National Bureau of Economic Research (NBER)

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Guillermo Vuletin

Brookings Institution ( email )

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