Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the FX puzzle). We show that incorporating forward-looking expectations into standard open economy structural VAR models resolves these puzzles. Specifically, we augment the models with novel survey-based measures of expectations based on consumer, business, and professional forecasts. We find that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the FX puzzle helps solve the price puzzle.
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- Acknowledgements & Disclosure
- We would like to thank Evi Pappa, David Furceri, George Kouretas, Cristiano Cantore, and an anonymous referee for detailed suggestions. The authors are also thankful to Carlos Arteta, Jakob De Haan, and other participants at the ICMAIF 2024, the PIER-ADB International Conference 2024, and the World Bank internal seminars for helpful comments. We gratefully acknowledge support from World Bank RSB Funds. The findings, interpretations, and conclusions expressed in this paper are those of the authors and do not necessarily represent the views of the institutions they are affiliated with, nor of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33133
- Pages
- 54
- Published in
- United States of America
Table of Contents
- NBER WORKING PAPER SERIES 1
- RESOLVING PUZZLES OF MONETARY POLICY TRANSMISSION IN EMERGING MARKETS 1
- Jongrim Ha 1
- Dohan Kim M. Ayhan Kose Eswar S. Prasad 1
- Working Paper 33133 httpwww.nber.orgpapersw33133 1
- NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 November 2024 1
- Resolving Puzzles of Monetary Policy Transmission in Emerging Markets Jongrim Ha Dohan Kim M. Ayhan Kose and Eswar S. Prasad NBER Working Paper No. 33133 November 2024 JEL No. E31 E32 2
- Jongrim Ha World Bank 1818 H Street NW MC 2-511 Washington DC 20433 jongrimhaworldbank.org 2
- Dohan Kim 1818 H Street NW Washington DC DC 20433 dkim23worldbank.org 2
- World Bank 2
- M. Ayhan Kose World Bank 1818 H St NW Washington DC 20433 and Brookings institution and CEPR akoseworldbank.org 2
- Eswar S. Prasad Dyson School of Applied Economics and Management Cornell University 301A Warren Hall Ithaca NY 14853 and NBER eswar.prasadcornell.edu 2
- Resolving Puzzles of Monetary Policy Transmission in Emerging Markets 3
- I. Introduction 4
- II. A simple theoretical framework 6
- 𝑅 𝐸 𝜋 𝑟 6
- 𝑦 𝐸 𝑦 𝑅 𝐸 𝜋 𝑑 6
- 𝜋 𝑘𝑦 𝛽𝐸 𝜋 𝑠 6
- 𝑥 𝑟 𝑑 𝑠 𝑦 𝜋 𝑅 𝜋 𝑅 𝑟 𝑑 𝛽 𝑠 6
- III. Methodology and data 7
- 𝐴𝑌 𝐵 7
- 𝑌 𝐶 7
- 𝑋 𝜀 7
- 𝑌 𝑛 1 𝑋 𝐴 𝐵 𝑖 1 𝐶 𝑗 0 𝜀 𝑛 1 𝐸𝜀 𝜀 8
- 𝐼 𝐴 8
- 𝑌 𝛼 8
- 𝑌 𝛽 8
- 𝑋 𝑒 8
- 𝛼 𝐴 𝐵 𝑒 8
- 𝑒 𝑒 8
- 𝑆𝜀 𝑠 𝑠 𝜀 8
- 𝑆 𝐴 𝑒 8
- 𝑠 𝑠 8
- 𝑒 𝛴 𝐸𝑒 𝑒 8
- 𝐸𝑆𝑆 8
- 𝑌 𝐶 𝑆 𝜀 𝐶 𝑠 𝜀 8
- 𝐶 𝑠 𝜀 8
- 𝐶 𝑌 𝜀 8
- 𝐼𝑅𝐹 8
- 𝐶 𝑠 8
- 𝐶 𝐶 8
- IV. Empirical results 10
- 𝑖 𝐸 𝑥 𝑗 𝑥 𝑡 𝑦 𝜋 𝑢 𝑅 𝑅 𝑖 12
- 𝑥 𝑍 𝛼 𝜀 12
- 𝐸𝜋 𝐸𝑦 𝐸𝐹𝑋 𝐸𝜋 𝐸𝜋 𝐸𝜋 𝐸𝜋 𝜋 𝜋 13
- 𝐸𝜋 𝑡 13
- 𝐸𝜋 𝐸𝜋 𝐸𝜋 𝐸𝜋 𝜋 𝜋 13
- V. Further considerations the relation between price and FX puzzles 15
- VI. Conclusion 17
- References 17
- Figures 21
- Tables 25
- 𝐸𝜋 𝜋 𝐸𝜋 𝐸𝜋 27
- SUPPLEMENTARY APPENDIX 28
- NOT FOR PULICATION 28
- Resolving Puzzles of Monetary Policy Transmission in Emerging Markets 28
