Monetary Policy and the Short-Rate Disconnect in Emerging Economies

Pierre De Leo, Gita Gopinath and Sebnem Kalemli-Ozcan

No 17748, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We document that central banks in emerging economies follow the Taylor rule, lowering policy rates when inflation is below average and during economic slowdowns. However, unlike in advanced economies, short-term market rates in many emerging economies do not always move together with policy rates, both on average and over the business cycle. This short-rate disconnect arises from the importance of external financing conditions for domestic market rates in emerging economies. Emerging economies whose banks rely more on external funding and face high external premiums are more likely to experience this disconnect, which reduces the efficacy of monetary policy.

Keywords: Monetary policy; Financial intermediation; Global financial conditions (search for similar items in EconPapers)
JEL-codes: E43 E50 E52 F30 (search for similar items in EconPapers)
Date: 2022-12
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Working Paper: Monetary Policy and the Short-Rate Disconnect in Emerging Economies (2022)
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