The Quiet Revolution in Emerging-Market Monetary Policy
Although emerging markets are no less at the mercy of advanced economies today than they were in the past, they are benefiting from massive spillover effects in the context of the current crisis. As a result, the ultra-expansionary monetary policies pioneered in advanced economies are now available to almost everyone.
LONDON – Central banking in emerging markets has undergone a quiet revolution during the COVID-19 pandemic. Unlike in past crises, they have been able to mimic what central banks in advanced economies have been implementing: counter-cyclical policies with quantitative easing (QE), local-currency asset purchases, interest-rate cuts, and monetization of government deficits.
In the past, such policies would have fueled inflation and downward exchange-rate pressure. Not so this time. With the exception of a few central banks that were already in trouble before the pandemic, emerging-market central banks have been able to use QE to create more room to maneuver in responding to the crisis.
Monetary policies in the advanced economies enabled this change. Their own QE programs have had positive spillover effects, and they have expanded their currency swaps and foreign exchange repurchase (repo) operations in response to the crisis. Among the measures taken by the globally systemic central banks (GSCBs), the US Federal Reserve’s response has been the most important, but swaps and repos by the European Central Bank (ECB) and the People’s Bank of China’s (PBOC) have also had a significant impact at the regional level.