Discussion Paper Details

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Title: Monetary Policy Transmission in Emerging Markets and Developing Economies

Author(s): Luis Brandão-Marques, Gaston Gelos, Thomas Harjes, Ratna Sahay and Yi Xue

Publication Date: March 2021

Keyword(s): emerging markets, Exchange rate channel, Financial structure, Inflation targeting and monetary policy

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Brandão-Marques, L, Gelos, G, Harjes, T, Sahay, R and Xue, Y. 2021. 'Monetary Policy Transmission in Emerging Markets and Developing Economies'. London, Centre for Economic Policy Research.