Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/308290 
Year of Publication: 
2024
Series/Report no.: 
IZA Discussion Papers No. 17431
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
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.
Subjects: 
monetary policy
emerging market economies
prize puzzle
foreign exchange puzzle
JEL: 
E31
E32
Q43
Document Type: 
Working Paper

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