Monetary Policy Transmission in Emerging Markets and Developing Economies

55 Pages Posted: 18 Mar 2020

See all articles by Luis Brandao-Marques

Luis Brandao-Marques

International Monetary Fund - Monetary and Capital Markets Department

Gaston Gelos

International Monetary Fund

Thomas Harjes

International Monetary Fund (IMF)

Ratna Sahay

International Monetary Fund (IMF) - Developing Country Studies Division; National Bureau of Economic Research (NBER)

Yi Xue

International Monetary Fund (IMF)

Date Written: February 2020

Abstract

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

Brandao-Marques, Luis and Gelos, R. Gaston and Harjes, Thomas and Sahay, Ratna and Xue, Yi, Monetary Policy Transmission in Emerging Markets and Developing Economies (February 2020). IMF Working Paper No. 20/35. Available at SSRN: https://ssrn.com/abstract=3555906

Luis Brandao-Marques (Contact Author)

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States
2026238308 (Phone)
2025898308 (Fax)

R. Gaston Gelos

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Thomas Harjes

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ratna Sahay

International Monetary Fund (IMF) - Developing Country Studies Division ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7181 (Phone)
202-623-7271 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yi Xue

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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