The endogeneity of monetary policies of emerging market economies

We analyse the responses of the monetary policy of five (Brazil, Chile, Mexico, India, and South Africa) emerging market economies (EME) to domestic and external (U.S.) shocks. We argue that the domestic policy rate is sensitive to risk premiums, financial markets, and the world economy, showing that Taylor’s Rule can benefit from the inclusion of these variables to understand the behaviour of the monetary authority. Therefore, our results suggest the following: i) policy rates are affected by risk premiums, ii) domestic monetary policy is affected by exchange rates, stock markets, and the U.S. and iii) there is heterogeneity in the factors explaining the behaviour of central banks.