Resolving Puzzles of Monetary Policy Transmission in Emerging Markets

Jongrim Ha, Dohan Kim, M. Ayhan Kose and Eswar Prasad

No 19664, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle.

JEL-codes: E31 E32 Q43 (search for similar items in EconPapers)
Date: 2024-11
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