Monetary Policy and the Short-Rate Disconnect in Emerging Economies

Pierre De Leo, Gita Gopinath and Sebnem Kalemli-Ozcan

No 30458, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that emerging market central banks adhere to Taylor-type rules and lower their policy rates when economic activity slows down, including as a response to U.S. monetary policy tightening. This suggests a countercyclical monetary policy stance. However, in contrast to advanced economies, short-term market rates do not move in tandem with policy rates. Market rates, if anything, tend to increase during recessions. We present evidence that this disconnect between policy rates and market rates can be significantly explained by fluctuations in dollar funding premia that get transmitted into local market rates through the banking sector that relies on foreign funding. Our findings shed light on the challenges to transmission and effectiveness of monetary policy in emerging economies.

JEL-codes: E0 F0 F3 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
Note: EFG IFM
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Working Paper: Monetary Policy and the Short-Rate Disconnect in Emerging Economies (2022)
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