DOI: 10.11648/j.ijber.20261505.14 ISSN: 2328-756X

Monetary Policy Transmission in the Real Economy: A Cross-Country Comparison of Developed and Emerging Economies

Austine Okereke, Yunana Zigwai, Anih Onyebuchi
Show PDF Cite
Monetary policy transmission varies systematically across development levels, yet empirical evidence on the magnitude and mechanisms of this heterogeneity remains fragmented. This paper examines cross-country differences in transmission strength by comparing empirical proxy structural vector autoregression (SVAR) estimates with predictions from a calibrated New Keynesian dynamic stochastic general equilibrium (DSGE) model. Using World Bank macroeconomic data for eleven economies from 2000 to 2023, five advanced economies (the United States, Germany, Japan, the United Kingdom, and France) and six emerging economies (Brazil, India, South Africa, Mexico, Indonesia, and Nigeria), we isolate exogenous lending rate shocks using Taylor-rule residuals as external instruments within a proxy SVAR framework. We benchmark the resulting impulse responses against a Gertler-Karadi banking model with financial frictions, calibrated separately for advanced and emerging economy parameters. Three main findings emerge. First, proxy SVAR identification attenuates the price puzzle and recovers transmission patterns that recursive Cholesky ordering obscures. Second, transmission is stronger in emerging economies: a 100-basis-point tightening raises unemployment by 0.27 percentage points at the seven-year horizon, compared with 0.09 percentage points in advanced economies. Third, the DSGE model systematically overpredicts transmission strength; for developed-economy unemployment, proxy SVAR recovers an empirical response magnitude 72 times larger than Cholesky identification, substantially narrowing the model-empirical gap. Nigeria illustrates structurally impaired transmission, where private credit at 11 percent of GDP proves insufficient to support conventional credit channels. These findings indicate that monetary policy alone cannot stabilize financially shallow economies. The paper informs the design of complementary policy frameworks that integrate interest rate policy with macroprudential instruments, capital flow management, and sequenced financial deepening strategies tailored to local institutional capacity.

More from our Archive