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Foreign monetary policy and domestic inflation in emerging markets

Author

Listed:
  • Marco Flaccadoro

    (Bank of Italy)

  • Valerio Nispi Landi

    (Bank of Italy)

Abstract

We estimate the response of domestic inflation to a US interest rate shock in a sample of 27 emerging economies, using local projection methods. Our results point out that the sign of the inflation response crucially depends on the monetary policy framework: after a US monetary policy tightening, inflation decreases in peggers; inflation increases in floaters that do not target inflation; the inflation response is not statistically different from zero in floaters that are committed to an inflation target. We rationalize this outcome using a standard DSGE model. We show that pegging the exchange rate yields larger welfare losses compared to the other two monetary policy frameworks, even assuming dominant currency pricing.

Suggested Citation

  • Marco Flaccadoro & Valerio Nispi Landi, 2022. "Foreign monetary policy and domestic inflation in emerging markets," Temi di discussione (Economic working papers) 1365, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1365_22
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2022/2022-1365/en_tema_1365.pdf
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    More about this item

    Keywords

    inflation stabilization; inflation targeting; monetary policy; open economy macroeconomics;
    All these keywords.

    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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