Monetary Policy Transmission in Emerging Markets and Developing Economies
55 Pages Posted: 18 Mar 2020
Date Written: February 2020
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.
Keywords: Financial and Monetary Sector, Central bank independence, Nominal effective exchange rate, Monetary policy instruments, Exchange rate policy, Monetary Policy, Emerging markets, Exchange rate channel, Inflation targeting, Financial structure, WP, financial development, monetary policy framework, policy framework, Taylor rule, projection method
JEL Classification: E3, E40, E5, F4, G1, E52, O24, E01, G21, L31
Suggested Citation: Suggested Citation