Monetary Policy in Emerging Markets under Global Uncertainty

Juan Hernandez, Mateo Hoyos and Daniel Ventosa-Santaulària

No DTE 634, Working Papers from CIDE, División de Economía

Abstract: In this paper, we examine the impact of global uncertainty on the effectiveness of monetary policy in reducing inflation in emerging market economies (EMEs). Specifically, we explore the repercussions of: (i) global financial stress; (ii) disruptions in the global supply chain; (iii) heightened levels of global geopolitical uncertainty; and (iv) anomalies attributed to climate change. Our main contribution is to demonstrate that monetary policy in EMEs is effective, albeit to a lesser extent, in reducing inflation when uncertainty is heightened due to global factors. We also find that, among the shocks we study, disruptions in the global supply chain affect the most the policy transmission mechanisms. To identify the monetary policy shocks, we use a trilemma-based instrument exploiting surprises in the federal funds rate, and cross section variation in capital account openness of each EME. Our results underscore the complexities inherent in navigating monetary policy within an uncertain global outlook for EMES.

Keywords: Inflation; Monetary Policy; Emerging Market Economies; Financial Volatility; Global Supply Chain; Policy Uncertainty; Climate Change (search for similar items in EconPapers)
JEL-codes: C23 C26 C54 E31 E52 F41 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2024-07
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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