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Foreign monetary policy and domestic inflation in emerging markets

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  • Flaccadoro, Marco
  • Nispi Landi, Valerio

Abstract

We set up a New Keynesian model for a small open economy with dominant currency pricing, to study the response of domestic inflation to an increase in the US interest rate. We show that the sign of the inflation response crucially depends on the monetary policy regime: after a US monetary tightening, inflation decreases in countries with an exchange rate peg; it increases in countries with a flexible exchange rate, unless the country follows a strict inflation targeting: in this latter case, inflation barely moves. These results are consistent with empirical evidence in a sample of emerging economies, using local projection methods.

Suggested Citation

  • Flaccadoro, Marco & Nispi Landi, Valerio, 2025. "Foreign monetary policy and domestic inflation in emerging markets," Journal of International Money and Finance, Elsevier, vol. 159(C).
    • Handle: RePEc:eee:jimfin:v:159:y:2025:i:c:s026156062500169x
    DOI: 10.1016/j.jimonfin.2025.103434
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    Cited by:

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    2. Moro, Alessandro & Nispi Landi, Valerio, 2024. "The external financial spillovers of CBDCs," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).

    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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