Fiscal and monetary policy in emerging market economies: what are the risks and policy trade-offs?

Ana Aguilar, Carlos Cantu Garcia and Rafael Guerra

No 71, BIS Bulletins from Bank for International Settlements

Abstract: Since 2021, monetary policy has tightened globally in response to the surge in inflation. Fiscal policies have generally remained expansionary, notably as governments put in place subsidies and transfers to insulate households, first from the pandemic and then from higher energy and food prices. Such fiscal support increases governments' funding needs at a time when tighter monetary policies raise the cost of servicing debts. Financial markets may reassess fiscal sustainability, request higher risk premia or reduce their holdings of sovereign bonds. Although such effects could affect both advanced and emerging market economies, the latter have historically been most vulnerable to a rise in the cost of international financing and a weaker exchange rate.

Pages: 9 pages
Date: 2023-03-29
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