Template-Type: ReDIF-Article 1.0
Author-Name: Mikael Juselius
Author-Name: Dora Xia
Title: Monetary responses to external shocks in emerging market economies: the role of financial vulnerabilities
Abstract: We examine how reliance on external funding and foreign exchange (FX) market depth shape monetary policy responses to external shocks in emerging market economies (EMEs) with floating exchange rate arrangements. Using a panel of EMEs, we document that central banks in economies with both high external foreign currency debt and shallow FX markets move their policy rates in step with US monetary policy surprises. Notably, these countries show smaller exchange rate moves compared with other countries, consistent with the policy actions dampening FX fluctuations. Other economies, including those with larger external local currency debt, do not display these patterns. We also find that EMEs with shallow FX markets tend to deploy FX intervention following US monetary policy surprises.
Journal: BIS Quarterly Review
File-URL: https://www.bis.org/publ/qtrpdf/r_qt2603e.pdf
File-Format: Application/pdf
File-URL: https://www.bis.org/publ/qtrpdf/r_qt2603e.htm
File-Format: text/html
Year: 2026
Month: March
Classification-JEL: E58, F41, F42
Handle: RePEc:bis:bisqtr:2603e