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Monetary Policy Rules in Emerging Market Economies: Issues and Evidence

In: Monetary Policy and Macroeconomic Stabilization in Latin America

Author

Listed:
  • M. S. Mohanty

    (Bank for International Settlements)

  • Marc Klau

    (Bank for International Settlements)

Abstract

The paper reviews the recent conduct of monetary policy and the central banks’ interest rate setting behaviour in emerging market economies. Using a standard open economy reaction function, we test whether central banks in emerging market economies react to changes in inflation, output gap, and the exchange rate in a consistent and predictable manner. In most emerging market economies, the interest rate responds strongly to the exchange rate; in some, the response is higher than that to changes in the inflation rate or the output gap. The result is robust to alternative specification and estimation methods. This highlights the importance of the exchange rate as a source of shock and supports the “fear of floating” hypothesis. Evidence also suggests that in some countries the central bank’s response to a negative inflation shock might be weaker than to a positive shock.

Suggested Citation

  • M. S. Mohanty & Marc Klau, 2005. "Monetary Policy Rules in Emerging Market Economies: Issues and Evidence," Springer Books, in: Rolf J. Langhammer & Lúcio Vinhas Souza (ed.), Monetary Policy and Macroeconomic Stabilization in Latin America, pages 205-245, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-28201-3_13
    DOI: 10.1007/3-540-28201-7_13
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