Working Paper: CEPR ID: DP15931
Authors: Luis Brando Marques; Gaston Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
Abstract: The effectiveness of monetary policy transmission in emerging markets and developing countries (EMDEs) remains subject to considerable debate in academia and among policymakers. Can EMDEs effectively steer inflation and output by controlling short-term interest rates? Or do structural features of these economies, in particular a lack of financial market depth, hinder such transmission? We conduct a novel empirical analysis using Jordà’s (2005) approach for 39 EMDEs to answer these questions. We find that interest rate hikes do reduce output growth and inflation, if the exchange rate is allowed to adjust. Inflation targeting frameworks adopted by independent and transparent central banks matter more than structural features, such as financial development.
Keywords: monetary policy; emerging markets; exchange rate channel; inflation targeting; financial structure
JEL Codes: E3; E4; E5; F4; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate hikes (E43) | output growth (O40) |
| interest rate hikes (E43) | inflation (E31) |
| monetary policy frameworks (E63) | monetary policy transmission (F42) |
| financial dollarization (F31) | monetary policy transmission (F42) |