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Monetary responses to external shocks in emerging market economies: the role of financial vulnerabilities

Author

Listed:
  • Mikael Juselius
  • Dora Xia

Abstract

We examine how reliance on external funding and foreign exchange (FX) market depth shape monetary policy responses to external shocks in emerging market economies (EMEs) with floating exchange rate arrangements. Using a panel of EMEs, we document that central banks in economies with both high external foreign currency debt and shallow FX markets move their policy rates in step with US monetary policy surprises. Notably, these countries show smaller exchange rate moves compared with other countries, consistent with the policy actions dampening FX fluctuations. Other economies, including those with larger external local currency debt, do not display these patterns. We also find that EMEs with shallow FX markets tend to deploy FX intervention following US monetary policy surprises.

Suggested Citation

  • Mikael Juselius & Dora Xia, 2026. "Monetary responses to external shocks in emerging market economies: the role of financial vulnerabilities," BIS Quarterly Review, Bank for International Settlements, March.
    • Handle: RePEc:bis:bisqtr:2603e
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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