How Might EME Central Banks Respond to the Influence of Global Monetary Factors?

26 Pages Posted: 7 Oct 2014

See all articles by Blaise Gadanecz

Blaise Gadanecz

Bank for International Settlements - Monetary and Economic Department

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department

Jörg Urban

Bank for International Settlements (BIS)

Date Written: August 2014

Abstract

Easy monetary conditions in advanced economies have played an important role in determining domestic monetary conditions in emerging market economies (EMEs), notably through the exchange rate and domestic bond yields. How can EME central banks best react to such external influences? Using a small, highly stylised and non-structural monetary policy model, we show that setting the policy interest rate in response to movements in the exchange rate and the yield on domestic long-term bonds – in addition to focusing on more traditional domestic variables such as the output gap and the inflation gap – can make monetary policy more effective. But there are important caveats and trade-offs, notably with respect to uncertainty about the structure of the economy and opposing effects of exchange rates and bond yields on domestic monetary conditions.

Full publication: The Transmission of Unconventional Monetary Policy to the Emerging Markets

Keywords: Emerging market economies, monetary policy, exchange rate, bond yields

JEL Classification: E43, E 52, E58, F31, F36, F42

Suggested Citation

Gadanecz, Blaise and Miyajima, Ken and Urban, Jörg, How Might EME Central Banks Respond to the Influence of Global Monetary Factors? (August 2014). BIS Paper No. 78c, Available at SSRN: https://ssrn.com/abstract=2498152

Blaise Gadanecz (Contact Author)

Bank for International Settlements - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41 61 280 8417 (Phone)
+41 61 280 8100 (Fax)

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Jörg Urban

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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