IDEAS home Printed from https://ideas.repec.org/a/bis/bisqtr/2603e.html

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
    as

    Download full text from publisher

    File URL: https://www.bis.org/publ/qtrpdf/r_qt2603e.pdf
    Download Restriction: no
    File URL: https://www.bis.org/publ/qtrpdf/r_qt2603e.htm
    Download Restriction: no
    ---><---

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:bisqtr:2603e. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Martin Fessler (email available below). General contact details of provider: https://edirc.repec.org/data/bisssch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.