Resolving Puzzles of Monetary Policy Transmission in Emerging Markets

Jongrim Ha, Dohan Kim (), Ayhan Kose and Eswar Prasad
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Dohan Kim: World Bank

No 17431, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle.

Keywords: monetary policy; emerging market economies; prize puzzle; foreign exchange puzzle (search for similar items in EconPapers)
JEL-codes: E31 E32 Q43 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2024-11
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Related works:
Journal Article: Resolving puzzles of monetary policy transmission in emerging markets (2025)
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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