Sunday , November 29 2020
Home / Amol Agrawal: Mostly Economics / Monetary policy response in emerging market economies: why was it different this time?

Monetary policy response in emerging market economies: why was it different this time?

Summary:
In 2020 crisis, EME central banks were able to cut policy rates despite fears over currency depreciation and capital outflows. Ana Aguilar and Carlos Cantú of BIS in this short paper point how EME central banks could do so: During the Covid-19-induced financial stress in March 2020, central banks in emerging market economies (EMEs) departed from their monetary policy playbook by cutting rates even in the face of sharp currency depreciations and massive capital outflows. Two factors were at play. First, the cyclical position of EMEs gave more room for easing of monetary policy, while structural changes improved the anchoring of inflation expectations and kept a lid on exchange rate pass-through. Second, the swift monetary policy easing by the Federal Reserve and other advanced economy

Topics:
Amol Agrawal considers the following as important: , ,

This could be interesting, too:

Amol Agrawal writes Two Goals, Two Lessons | What central bankers can learn from Diego Maradona

Amol Agrawal writes From Valuable to Worthless and Back Again: Pre-1950 Chinese Currency

Amol Agrawal writes What’s in a name: Name of Saudi Arabian Monetary Authority changed to the Saudi Central Bank

Amol Agrawal writes Responses of International Central Banks to the COVID-19 Crisis

In 2020 crisis, EME central banks were able to cut policy rates despite fears over currency depreciation and capital outflows.

Ana Aguilar and Carlos Cantú of BIS in this short paper point how EME central banks could do so:

  • During the Covid-19-induced financial stress in March 2020, central banks in emerging market economies (EMEs) departed from their monetary policy playbook by cutting rates even in the face of sharp currency depreciations and massive capital outflows.
  • Two factors were at play. First, the cyclical position of EMEs gave more room for easing of monetary policy, while structural changes improved the anchoring of inflation expectations and kept a lid on exchange rate pass-through. Second, the swift monetary policy easing by the Federal Reserve and other advanced economy central banks calmed global financial conditions. These policies capped the appreciation pressures on the US dollar, an EME risk factor, and gave EMEs greater room to cut interest rates.
  • Monetary easing and asset purchases helped cushion the impact of portfolio outflows on local currency sovereign bond markets. Synchronised monetary and fiscal policies supported one another.

Both monetary and fiscal policy across the world seems to be synchronising on easy policies. Will it sow the seeds for the next crisis?

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

Leave a Reply

Your email address will not be published. Required fields are marked *