Resolving puzzles of monetary policy transmission in emerging markets

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

European Economic Review, 2025, vol. 173, issue C

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 foreign exchange puzzle). This paper shows that incorporating forward-looking expectations into standard open economy structural vector autoregressive models resolves these puzzles. Specifically, the models are augmented with novel survey-based measures of expectations based on consumer, business, and professional forecasts. The findings show that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the foreign exchange puzzle helps solve the price puzzle.

Keywords: Monetary policy; Emerging market economies; Price puzzle; Foreign exchange puzzle (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E52 (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: Resolving Puzzles of Monetary Policy Transmission in Emerging Markets (2024)
Working Paper: Resolving Puzzles of Monetary Policy Transmission in Emerging Markets (2024)
Working Paper: Resolving Puzzles of Monetary Policy Transmission in Emerging Markets (2024)
Working Paper: Resolving Puzzles of Monetary Policy Transmission in Emerging Markets (2024)
Working Paper: Resolving Puzzles of Monetary Policy Transmission in Emerging Markets (2024)
Working Paper: Resolving Puzzles of Monetary Policy Transmission in Emerging Markets (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:173:y:2025:i:c:s0014292125000078

DOI: 10.1016/j.euroecorev.2025.104957

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