Resolving Puzzles of Monetary Policy Transmission in Emerging Markets

Ayhan Kose, Jongrim Ha, Dohan Kim and Eswar Prasad

No 10974, Policy Research Working Paper Series from The World Bank

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 foreign exchange puzzle). This paper shows that incorporating forward-looking expectations into standard open economy structural vector autoregressive models resolves these puzzles. Specifically, the models are augmented with novel survey-based measures of expectations based on consumer, business, and professional forecasts. The findings show that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the foreign exchange puzzle helps solve the price puzzle.

Date: 2024-11-14
New Economics Papers: this item is included in 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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