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Monetary Policy Transmission in Emerging Markets and Developing Economies

Thomas Harjes, Luis Brandao Marques (), Yi Xue, R. Gaston Gelos () and Ratna Sahay

No 2020/035, IMF Working Papers from International Monetary Fund

Abstract: Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.

Keywords: WP; exchange rate; inflation targeting; interest rate; monetary policy shock; reaction function; monetary policy transmission; exchange rate channel; interest-rate-based monetary policy; interest rate shock; unit monetary policy shock; nominal exchange rate; transmission mechanism; monetary policy rate; dummy variable; IT framework; Financial sector development; Exchange rates; Monetary policy frameworks; Central bank policy rate; Consumer price indexes; Global; Africa; Monetary Policy; Emerging markets; Financial structure; monetary policy framework; monetary policy channel (search for similar items in EconPapers)
Pages: 54
Date: 2020-02-21
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-mon
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