The Transmission of Unconventional Monetary Policy to the Emerging Markets - An Overview
24 Pages Posted: 7 Oct 2014
Date Written: August 2014
Highly accommodative monetary policies in the major advanced economies and the questions bout the exit from such policies have created major challenges for policymakers in emerging market economies (EMEs). Quite a few of EMEs that experienced rapid capital inflows and strong currency appreciation pressures during 2010-12 saw a sharp reversal in episodes of market volatility from May 2013 to February 2014.
This meeting of Deputy Governors focused on three main questions: (i) How can external monetary conditions become a source of risks to monetary and financial stability in EMEs? (ii) How should central banks respond to such shocks? (iii) And, can there be a greater international role for emerging market currencies? A key conclusion from the discussion is that asset prices and interest rates have become more correlated globally during the period of unprecedented monetary easing by advanced economies. One major worry was the risk of an abrupt reversal of capital inflows to EMEs. Central banks face difficult policy dilemmas in preserving financial stability while pursuing their monetary policy goals. It is hard for EME monetary authorities to counter a prolonged period of very low long-term interest rates and increased risk-taking in global financial markets.
Keywords: Monetary policy, international spillover, emerging market economies, capital flows, exchange rate, long term interest rates
JEL Classification: E52, F31, F42, G12, G1
Suggested Citation: Suggested Citation