Changing Financial Intermediation : Implications for Monetary Policy Transmission

We show that despite heterogeneous financial intermediation structures in EMEs, bank credit remains a powerful channel of policy transmission in these countries. Credit conditions have been affected by global factors. In particular, our empirical results suggest that exchange rate appreciation tends to boost credit expansion through a currency risk-taking channel. To the extent that new credit boosts growth which in turn generates further appreciation, the link creates the possibility of positive feedback loops. Furthermore, we find that risk premium shocks have had important effects on EMEs, through their impact on both bank and non-bank credit. Against this backdrop, we argue that the standard monetary policy rules may be inadequate in meeting the multi-faceted challenges arising from financial globalization, and there is a growing case for expanding the policy toolkit.Full publication: "http://ssrn.com/abstract=2692232" What Do New Forms of Finance Mean for EM Central Banks?