The endogeneity of monetary policies of emerging market economies

Abstract

ABSTRACTWe analyse the responses of the monetary policy of five (Brazil, Chile, Mexico, India, and South Africa) emerging market economies (EME) to domestic and external (U.S.) shocks. We argue that the domestic policy rate is sensitive to risk premiums, financial markets, and the world economy, showing that Taylor’s Rule can benefit from the inclusion of these variables to understand the behaviour of the monetary authority. Therefore, our results suggest the following: i) policy rates are affected by risk premiums, ii) domestic monetary policy is affected by exchange rates, stock markets, and the U.S. and iii) there is heterogeneity in the factors explaining the behaviour of central banks.KEYWORDS: Monetary policypolicy raterisk premiumEmerging market economiesGVARJEL classification: E52E32E37F47 Disclosure statementNo potential conflict of interest was reported by the author(s).Data availability statementThe data supporting the findings of this study are available from the corresponding author upon reasonable request.Additional informationFundingThis research did not receive any specific grants from public, commercial, or non-profit agencies.Notes on contributorsLuccas Assis AttílioLuccas Assis Attílio, Professor of Economics at the Federal University of Ouro Preto (UFOP). Ph.D. in Economics at the University of São Paulo (USP).