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Monetary Policy in Emerging Markets under Global Uncertainty

Author

Listed:
  • Juan R. Hernández

    (Division of Economics, CIDE)

  • Mateo Hoyos

    (Division of Economics, CIDE)

  • Daniel Ventosa-Santaulària

    (Division of Economics, CIDE)

Abstract

In this paper, we examine the impact of global uncertainty on the effectiveness of monetary policy in reducing inflation in emerging market economies (EMEs). Specifically, we explore the repercussions of: (i) global financial stress; (ii) disruptions in the global supply chain; (iii) heightened levels of global geopolitical uncertainty; and (iv) anomalies attributed to climate change. Our main contribution is to demonstrate that monetary policy in EMEs is effective, albeit to a lesser extent, in reducing inflation when uncertainty is heightened due to global factors. We also find that, among the shocks we study, disruptions in the global supply chain affect the most the policy transmission mechanisms. To identify the monetary policy shocks, we use a trilemma-based instrument exploiting surprises in the federal funds rate, and cross section variation in capital account openness of each EME. Our results underscore the complexities inherent in navigating monetary policy within an uncertain global outlook for EMES.

Suggested Citation

  • Juan R. Hernández & Mateo Hoyos & Daniel Ventosa-Santaulària, 2024. "Monetary Policy in Emerging Markets under Global Uncertainty," Working Papers DTE 634, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte634
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    More about this item

    Keywords

    Inflation; Monetary Policy; Emerging Market Economies; Financial Volatility; Global Supply Chain; Policy Uncertainty; Climate Change;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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