Abstract
Financial conditions in the emerging markets (EMs) have become more dependent on the ‘world’ long-term interest rate, which has been driven down by monetary policies in the advanced economies – notably Quantitative Easing (QE) – and by several non-monetary factors. This paper analyzes some new mechanisms that link global long-term rates to monetary policy and to domestic bank lending in the EMs. Understanding these mechanisms could help EM central banks prepare for the exit from QE and higher policy rates in advanced economies. Monetary policy in the EMs has lost some traction, and difficult trade-offs confront central banks.
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