DP15931 Monetary Policy Transmission in Emerging Markets and Developing Economies

Author(s): Luis Brandão-Marques, Gaston Gelos, Thomas Harjes, Ratna Sahay, Yi Xue
Publication Date: March 2021
Date Revised: March 2021
Keyword(s): emerging markets, Exchange rate channel, Financial structure, Inflation targeting, monetary policy
JEL(s): E3, E4, E5, F4, G1
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15931

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.