IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/15931.html
   My bibliography  Save this paper

Monetary Policy Transmission in Emerging Markets and Developing Economies

Author

Listed:
  • Brandao-Marques, Luis
  • Harjes, Thomas
  • Sahay, Ratna
  • Xue, Yi
  • Gelos, Gaston

Abstract

The effectiveness of monetary policy transmission in emerging markets and developing countries (EMDEs) remains subject to considerable debate in academia and among policymakers. Can EMDEs effectively steer inflation and output by controlling short-term interest rates? Or do structural features of these economies, in particular a lack of financial market depth, hinder such transmission? We conduct a novel empirical analysis using Jordà ’s (2005) approach for 39 EMDEs to answer these questions. We find that interest rate hikes do reduce output growth and inflation, if the exchange rate is allowed to adjust. Inflation targeting frameworks adopted by independent and transparent central banks matter more than structural features, such as financial development.

Suggested Citation

  • Brandao-Marques, Luis & Harjes, Thomas & Sahay, Ratna & Xue, Yi & Gelos, Gaston, 2021. "Monetary Policy Transmission in Emerging Markets and Developing Economies," CEPR Discussion Papers 15931, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15931
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP15931
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Department of Economics, Working Paper Series qt5pv1j341, Department of Economics, UC Santa Cruz.
    3. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    4. Alessandro Calza & Tommaso Monacelli & Livio Stracca, 2013. "Housing Finance And Monetary Policy," Journal of the European Economic Association, European Economic Association, vol. 11, pages 101-122, January.
    5. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    6. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    7. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    8. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    9. N. Nergiz Dincer & Barry Eichengreen, 2014. "Central Bank Transparency and Independence: Updates and New Measures," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 189-259, March.
    10. Hilde C. Bjørnland, 2008. "Monetary Policy and Exchange Rate Interactions in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 197-221, March.
    11. Gelos, Gaston & Ustyugova, Yulia, 2017. "Inflation responses to commodity price shocks – How and why do countries differ?," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 28-47.
    12. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    13. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    14. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    15. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
    16. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    17. Abuka, Charles & Alinda, Ronnie K. & Minoiu, Camelia & Peydró, José-Luis & Presbitero, Andrea F., 2019. "Monetary Policy and Bank Lending in Developing Countries: Loan Applications, Rates, and Real Effects," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 139, pages 185-202.
    18. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters, in: The Inflation-Targeting Debate, pages 249-276, National Bureau of Economic Research, Inc.
    19. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    20. Valentina Bruno & Hyun Song & Itay Goldstein, 2023. "Dollar and Exports," The Review of Financial Studies, Society for Financial Studies, vol. 36(8), pages 2963-2996.
    21. Filardo, Andrew & Genberg, Hans & Hofmann, Boris, 2016. "Monetary analysis and the global financial cycle: An Asian central bank perspective," Journal of Asian Economics, Elsevier, vol. 46(C), pages 1-16.
    22. Stefan Avdjiev & Valentina Bruno & Catherine Koch & Hyun Song Shin, 2019. "The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 151-173, March.
    23. Barajas, Adolfo & Chami, Ralph & Ebeke, Christian & Oeking, Anne, 2018. "What's different about monetary policy transmission in remittance-dependent countries?," Journal of Development Economics, Elsevier, vol. 134(C), pages 272-288.
    24. Bank for International Settlements, 2008. "Transmission mechanisms for monetary policy in emerging market economies," BIS Papers, Bank for International Settlements, number 35.
    25. Mr. Luc Laeven & Mr. Fabian Valencia, 2018. "Systemic Banking Crises Revisited," IMF Working Papers 2018/206, International Monetary Fund.
    26. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    27. Adler, Gustavo & Lisack, Noëmie & Mano, Rui C., 2019. "Unveiling the effects of foreign exchange intervention: A panel approach," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    28. Grilli, Vittorio & Roubini, Nouriel, 1996. "Liquidity models in open economies: Theory and empirical evidence," European Economic Review, Elsevier, vol. 40(3-5), pages 847-859, April.
    29. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
    30. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184, National Bureau of Economic Research, Inc.
    31. Lin, Shu & Ye, Haichun, 2007. "Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2521-2533, November.
    32. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    33. Stephen G. Cecchetti, 2001. "Legal Structure, Financial Structure and the Monetary Policy Transmission Mechanism," Palgrave Macmillan Books, in: Deutsche Bundesbank (ed.), The Monetary Transmission Process, chapter 5, pages 170-207, Palgrave Macmillan.
    34. Hanna Samaryna & Jakob de Haan, 2011. "Right on Target: Exploring the Determinants of Inflation Targeting Adoption," DNB Working Papers 321, Netherlands Central Bank, Research Department.
    35. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
    36. Simon Gilchrist & David López-Salido & Egon Zakrajšek, 2015. "Monetary Policy and Real Borrowing Costs at the Zero Lower Bound," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 77-109, January.
    37. Fabio Canova, 2005. "The transmission of US shocks to Latin America," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 229-251.
    38. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    39. Tim Willems, 2020. "What Do Monetary Contractions Do? Evidence From Large Tightenings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 41-58, October.
    40. De Graeve, Ferre & De Jonghe, Olivier & Vennet, Rudi Vander, 2007. "Competition, transmission and bank pricing policies: Evidence from Belgian loan and deposit markets," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 259-278, January.
    41. Jeffrey A. Frankel, 2010. "Monetary Policy in Emerging Markets: A Survey," NBER Working Papers 16125, National Bureau of Economic Research, Inc.
    42. Adrián Armas & Francisco Grippa, 2005. "Targeting Inflation in a Dollarized Economy: The Peruvian Experience," Research Department Publications 4423, Inter-American Development Bank, Research Department.
    43. Lin, Shu & Ye, Haichun, 2009. "Does inflation targeting make a difference in developing countries?," Journal of Development Economics, Elsevier, vol. 89(1), pages 118-123, May.
    44. Michael Ehrmann, 2000. "Comparing monetary policy transmission across European countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(1), pages 58-83, March.
    45. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," The World Bank Economic Review, World Bank, vol. 6(3), pages 353-398, September.
    46. Mishra, Prachi & Montiel, Peter, 2013. "How effective is monetary transmission in low-income countries? A survey of the empirical evidence," Economic Systems, Elsevier, vol. 37(2), pages 187-216.
    47. Regis Barnichon & Christian Brownlees, 2019. "Impulse Response Estimation by Smooth Local Projections," The Review of Economics and Statistics, MIT Press, vol. 101(3), pages 522-530, July.
    48. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    49. Tim Willems, 2018. "What Do Monetary Contractions Do? Evidence From Large, Unanticipated Tightenings," IMF Working Papers 2018/211, International Monetary Fund.
    50. Pierre L. Siklos & Diana N. Weymark, 2009. "Has Inflation Targeting Improved Monetary Policy? Evaluating Policy Effectiveness in Australia, Canada, and New Zealand," Vanderbilt University Department of Economics Working Papers 0906, Vanderbilt University Department of Economics.
    51. William T. Gavin & Rachel J. Mandal, 2001. "Forecasting inflation and growth: do private forecasts match those of policymakers?," Review, Federal Reserve Bank of St. Louis, vol. 83(May), pages 11-20.
    52. International Monetary Fund, 2008. "Is Monetary Policy Effective When Credit is Low?," IMF Working Papers 2008/288, International Monetary Fund.
    53. Prachi Mishra & Peter J Montiel & Antonio Spilimbergo, 2012. "Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 270-302, July.
    54. Fabio Canova, 2005. "The transmission of US shocks to Latin America," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 229-251.
    55. Mr. Andrew Berg & Ms. Luisa Charry & Mr. Rafael A Portillo & Mr. Jan Vlcek, 2013. "The Monetary Transmission Mechanism in the Tropics: A Narrative Approach," IMF Working Papers 2013/197, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jongrim Ha & Dohan Kim & M. Ayhan Kose & Eswar S. Prasad, 2024. "Resolving Puzzles of Monetary Policy Transmission in Emerging Markets," NBER Working Papers 33133, National Bureau of Economic Research, Inc.
    2. Guénette, Justin Damien & Kose, M. Ayhan & Sugawara, Naotaka, 2022. "Is a Global Recession Imminent?," MPRA Paper 114627, University Library of Munich, Germany.
    3. Davide Furceri & Mr. Jonathan David Ostry, 2021. "Initial Output Losses from the Covid-19 Pandemic: Robust Determinants," IMF Working Papers 2021/018, International Monetary Fund.
    4. Jingwen Huo & Jing Meng & Heran Zheng & Priti Parikh & Dabo Guan, 2023. "Achieving decent living standards in emerging economies challenges national mitigation goals for CO2 emissions," Nature Communications, Nature, vol. 14(1), pages 1-11, December.
    5. Thornton, John & Vasilakis, Chrysovalantis, 2023. "Bank regulations and surges and stops in credit: Panel evidence," Journal of Financial Stability, Elsevier, vol. 67(C).
    6. Arnold Segawa, 2021. "Sentimental Outlook for the Monetary Policies of South African Reserve Bank," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(3), pages 37-56, July.
    7. María Fernanda Meneses-González & Angélica María Lizarazo-Cuellar & Diego Fernando Cuesta-Mora & Daniel Osorio-Rodríguez, 2022. "Financial Development and Monetary Policy Transmission," Borradores de Economia 1219, Banco de la Republica de Colombia.
    8. Mr. David J Hofman & Mr. Marcos d Chamon & Mr. Pragyan Deb & Mr. Thomas Harjes & Umang Rawat & Itaru Yamamoto, 2020. "Intervention Under Inflation Targeting--When Could It Make Sense?," IMF Working Papers 2020/009, International Monetary Fund.
    9. Fayyaz Hussain & Mehak Ejaz, 2022. "Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 45-67.
    10. Marwa Elsherif, 2024. "Modelling Inflation Dynamics and Global Oil Price Shocks in OAPEC Countries: TVP-VAR," International Journal of Energy Economics and Policy, Econjournals, vol. 14(3), pages 51-69, May.
    11. Dridi, Ichrak & Boughrara, Adel, 2023. "Flexible inflation targeting and stock market volatility: Evidence from emerging market economies," Economic Modelling, Elsevier, vol. 126(C).
    12. Fu, Liang & Ho, Chun-Yu, 2022. "Monetary policy surprises and interest rates under China's evolving monetary policy framework," Emerging Markets Review, Elsevier, vol. 52(C).
    13. Vanessa Olakemi Dovonou, 2023. "Trilemma revisited with dollar dominance in trade and finance," Working Papers 2023.05, International Network for Economic Research - INFER.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mai, Nhat Chi, 2016. "Monetary policies and the macroeconomic performance of Vietnam," OSF Preprints akzy4, Center for Open Science.
    2. Ilzetzki, Ethan & Jin, Keyu, 2021. "The puzzling change in the international transmission of U.S. macroeconomic policy shocks," Journal of International Economics, Elsevier, vol. 130(C).
    3. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    4. Guizani, Brahim, 2015. "Effectiveness of Monetary Policy In Economies in Democratic Transition: Evidence from Tunisia," MPRA Paper 63205, University Library of Munich, Germany.
    5. Marek Rusnak & Tomas Havranek & Roman Horvath, 2013. "How to Solve the Price Puzzle? A Meta-Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 37-70, February.
    6. Jongrim Ha & Dohan Kim & M. Ayhan Kose & Eswar S. Prasad, 2024. "Resolving Puzzles of Monetary Policy Transmission in Emerging Markets," NBER Working Papers 33133, National Bureau of Economic Research, Inc.
    7. Lee, Seungyoon & Park, Jongwook, 2022. "Identifying monetary policy shocks using economic forecasts in Korea," Economic Modelling, Elsevier, vol. 111(C).
    8. Silvia Miranda-Agrippino & Giovanni Ricco, 2021. "The Transmission of Monetary Policy Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 74-107, July.
    9. James Cloyne & Patrick Hürtgen, 2016. "The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 75-102, October.
    10. Auer, Simone, 2019. "Monetary policy shocks and foreign investment income: Evidence from a large Bayesian VAR," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 142-166.
    11. Champagne, Julien & Sekkel, Rodrigo, 2018. "Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 72-87.
    12. Brissimis, Sophocles N. & Magginas, Nicholas S., 2006. "Forward-looking information in VAR models and the price puzzle," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1225-1234, September.
    13. Dahlhaus, Tatjana & Vasishtha, Garima, 2021. "Reprint: Monetary policy news in the US: Effects on emerging market capital flows," Journal of International Money and Finance, Elsevier, vol. 114(C).
    14. Junankar, Pramod N. (Raja), 2019. "Monetary Policy, Growth and Employment in Developing Areas: A Review of the Literature," IZA Discussion Papers 12197, Institute of Labor Economics (IZA).
    15. Scholl, Almuth & Uhlig, Harald, 2008. "New evidence on the puzzles: Results from agnostic identification on monetary policy and exchange rates," Journal of International Economics, Elsevier, vol. 76(1), pages 1-13, September.
    16. Bu, Chunya & Rogers, John & Wu, Wenbin, 2021. "A unified measure of Fed monetary policy shocks," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 331-349.
    17. Dedola, Luca & Rivolta, Giulia & Stracca, Livio, 2017. "If the Fed sneezes, who catches a cold?," Journal of International Economics, Elsevier, vol. 108(S1), pages 23-41.
    18. Abuka, Charles & Alinda, Ronnie K. & Minoiu, Camelia & Peydró, José-Luis & Presbitero, Andrea F., 2019. "Monetary policy and bank lending in developing countries: Loan applications, rates, and real effects," Journal of Development Economics, Elsevier, vol. 139(C), pages 185-202.
    19. Mackowiak, Bartosz, 2006. "What does the Bank of Japan do to East Asia?," Journal of International Economics, Elsevier, vol. 70(1), pages 253-270, September.
    20. Marek Jarocinski, 2010. "Responses to monetary policy shocks in the east and the west of Europe: a comparison," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(5), pages 833-868.

    More about this item

    Keywords

    Monetary policy; Emerging markets; Exchange rate channel; Inflation targeting; Financial structure;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:cpr:ceprdp:15931. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    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.