Emerging Market Economies’ Challenge: Managing the Yield Curve in a Financially Globalized World

In a financially globalized world, managing long-term interest rates through short-term interest rates can be difficult. In this paper, we examine whether net capital inflows contribute to weakening the link between short- and long-term interest rates. We find that more financially open economies or those with more developed financial markets tend to have a greater negative relationship between net capital inflows and short- to long-term interest rate pass-through. We also examine whether macroprudential policies can affect the extent of interest rate pass-through and find that broad-based capital macroprudential tools are effective in retaining control of interest rate pass-through.