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Foreign monetary policy and domestic inflation in emerging markets

Marco Flaccadoro () and Valerio Nispi Landi ()
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Marco Flaccadoro: Bank of Italy

No 1365, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We estimate the response of domestic inflation to a US interest rate shock in a sample of 27 emerging economies, using local projection methods. Our results point out that the sign of the inflation response crucially depends on the monetary policy framework: after a US monetary policy tightening, inflation decreases in peggers; inflation increases in floaters that do not target inflation; the inflation response is not statistically different from zero in floaters that are committed to an inflation target. We rationalize this outcome using a standard DSGE model. We show that pegging the exchange rate yields larger welfare losses compared to the other two monetary policy frameworks, even assuming dominant currency pricing.

Keywords: inflation stabilization; inflation targeting; monetary policy; open economy macroeconomics (search for similar items in EconPapers)
JEL-codes: E31 E52 F41 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1365_22

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