Publication: Resolving Puzzles of Monetary Policy Transmission in Emerging Markets
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Date
2024-11-19
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2024-11-19
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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.
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“Ha, Jongrim; Kim, Dohan; Kose, M. Ayhan; Prasad, Eswar S.. 2024. Resolving Puzzles of Monetary Policy Transmission in Emerging Markets. Policy Research Working Paper; 10974. © World Bank. http://hdl.handle.net/10986/42437 License: CC BY 3.0 IGO.”
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