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Monetary Policy in Emerging Markets

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Author Info

  • Donal McGettigan
  • Kenji Moriyama
  • Jean F Noah Ndela Ntsama
  • Francois Painchaud
  • Haonan Qu
  • Chad Steinberg
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    Abstract

    In contrast to advanced markets (AMs), procyclical monetary policy has been a problem for emerging markets (EMs), with macroeconomic policies amplifying economic upswings and deepening downturns. The stark difference in policy has not been subject to extensive study and this paper attempts to address the gap. Key findings, using a large sample of EMs over the past 50 years, are: (i) EMs have adopted increasingly countercyclical monetary policy over time, although large differences remain among EMs and policies became more procyclical during the recent crisis. (ii) Inflation targeting and better institutions have been key factors behind the move to countercyclicality. (iii) Only deep financial markets allow EMs with flexible exchange rate regimes turn countercyclical. (iv) More countercyclical policy is associated with far less volatile output. The economically meaningful impact of IT on monetary policy countercyclicality and output variability is another reason in its favor, over and above better inflation outcomes.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/96.

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    Length: 30
    Date of creation: 03 May 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/96

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    Related research

    Keywords: Monetary policy; Emerging markets; Chile; Inflation targeting; Business cycles; Countercyclical Policy; real interest rates; nominal interest rates; terms of trade; real rates; real output; monetary aggregate; terms of trade shocks; reduction in inflation; foreign exchange; monetary institutions; real exchange rates; inflation data; inflation growth; rational expectations; inflation deviation; lower inflation; macroeconomic stability; actual inflation;

    This paper has been announced in the following NEP Reports:

    References

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    1. Carlos A. Vegh & Guillermo Vuletin, 2012. "Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets," NBER Working Papers 18175, National Bureau of Economic Research, Inc.
    2. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
    4. Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy Often Procyclical?," NBER Working Papers 11600, National Bureau of Economic Research, Inc.
    5. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
    6. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
    7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
    8. Vittorio Corbo & Klaus Schmidt-Hebbel, 2002. "Inflation Targeting in Latin America," Documentos de Trabajo 230, Instituto de Economia. Pontificia Universidad Católica de Chile..
    9. Rodrigo Fuentes & Fabián Gredig & Mauricio Larraín, 2007. "Estimating the Output Gap for Chile," Working Papers Central Bank of Chile 455, Central Bank of Chile.
    10. Lane, Philip R, 2003. "Business Cycles and Macroeconomic Policy in Emerging Market Economies," International Finance, Wiley Blackwell, vol. 6(1), pages 89-108, Spring.
    11. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    12. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    13. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 343-68, October.
    14. Leandro Medina & Nicolas E. Magud, 2011. "The Chilean Output Gap," IMF Working Papers 11/2, International Monetary Fund.
    15. Cristina Betancour & Jose De Gregorio & Juan Pablo Medina, 2006. "The “Great Moderation” and the Monetary Transmission Mechanism in Chile," Working Papers Central Bank of Chile 393, Central Bank of Chile.
    16. Jeffrey A. Frankel & Carlos A. Végh & Guillermo Vuletin, 2011. "On Graduation from Fiscal Procyclicality," NBER Working Papers 17619, National Bureau of Economic Research, Inc.
    17. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    18. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
    19. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
    20. Rodrigo Fuentes & Fabián Gredig, 2007. "Estimating the Chilean Natural Rate of Interest," Working Papers Central Bank of Chile 448, Central Bank of Chile.
    21. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
    22. Gabriela Inchauste & Bernardin Akitoby & Benedict J. Clements & Sanjeev Gupta, 2004. "The Cyclical and Long-Term Behavior of Government Expenditures in Developing Countries," IMF Working Papers 04/202, International Monetary Fund.
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