Monetary policy transmission in emerging markets: proverbial concerns, novel evidence

BIS Working Papers  |  No 1170  | 
11 March 2024



In recent years, considerable progress has been made in assessing the transmission of monetary policy in advanced economies. However, much less headway has been possible in the context of emerging market economies, mainly because of challenges in identifying monetary policy shocks. For example, identification approaches based on financial market reactions to monetary policy announcements are generally problematic in emerging markets due to a more limited level of financial development.


We construct a novel set of monetary policy shocks for 18 emerging markets using professional analysts' forecasts of policy rate decisions collected by Bloomberg. Crucial for identifying monetary policy shocks, Bloomberg allows analysts to revise their forecasts up to the time of monetary policy meetings to incorporate any relevant data releases. Forecast errors thus tend to reflect unexpected shifts in monetary policy that are independent of economic developments. We construct monetary policy shocks based on these forecast errors after removing any predictability based on macroeconomic and financial data available before monetary policy meetings. Using these shocks, we examine the transmission of monetary policy in emerging market economies to financial markets, macroeconomic aggregates and firm-level data.


We find that monetary policy transmission in emerging market economies operates similarly to that in advanced economies. Monetary tightening leads to an immediate and persistent increase in bond yields, a contraction in economic activity and a delayed decline in inflation. The magnitudes of these effects are in line with evidence from the United States. We also find that monetary policy tends to have a stronger effect on investment decisions by highly leveraged firms.


Proverbial concerns remain about the effectiveness of monetary policy in emerging markets. The empirical evidence is scarce due to challenges in identifying monetary policy shocks. In this paper, we construct new monetary policy shocks using analysts' forecasts of policy rate decisions. Crucial for identification, analysts can update forecasts up to the policy meeting to incorporate any information relevant to the policy rate decision. Using these shocks, we show that monetary transmission wields considerable traction on financial and macroeconomic conditions in emerging markets. Monetary tightening lifts bond yields, curbs real activity, reduces inflation, and impacts leveraged firms more strongly.

JEL classification: E50, E52

Keywords: monetary policy shocks, financial markets, emerging markets