Monetary Policy Rules in Emerging Market Economies: Issues and Evidence

39 Pages Posted: 20 Sep 2007

See all articles by Marc Klau

Marc Klau

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

Madhusudan S. Mohanty

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

Date Written: March 2004

Abstract

The paper reviews the recent conduct of monetary policy and central banks' interest rate setting behaviour in emerging market economies. Using a standard open economy reaction function, we test whether central banks in emerging economies react to changes in inflation, output gaps and the exchange rate in a consistent and predictable manner. In most emerging economies the interest rate responds strongly to the exchange rate; in some, the response is higher than that to changes in the inflation rate or the output gap. The result is robust to alternative specification and estimation methods. This highlights the importance of the exchange rate as a source of shock and supports the "fear of floating" hypothesis. Evidence also suggests that in some countries the central bank's response to a negative inflation shock might be weaker than to a positive shock.

Suggested Citation

Klau, Marc and Mohanty, Madhusudan S., Monetary Policy Rules in Emerging Market Economies: Issues and Evidence (March 2004). BIS Working Paper No. 149, Available at SSRN: https://ssrn.com/abstract=901388 or http://dx.doi.org/10.2139/ssrn.901388

Marc Klau (Contact Author)

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland
41 61 280 80 80 (Phone)
41 61 280 91 00 (Fax)

Madhusudan S. Mohanty

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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