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This study analyzes monetary policy reaction functions in emerging economies, finding credit spreads and fiscal imbalances significantly impact output, inflation, and interest rates. These shocks affect BRICS countries differently, highlighting varied economic dynamics.

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Area of Science:

  • Economics
  • Monetary Policy Analysis
  • Emerging Economies

Background:

  • Dynamic Stochastic General Equilibrium (DSGE) models are crucial for policy analysis due to their simplicity and forward-looking variables.
  • Understanding the interplay of credit spreads, fiscal imbalances, and monetary autonomy is vital for emerging economies.
  • BRICS countries represent a significant bloc of emerging economies with unique economic characteristics.

Purpose of the Study:

  • To estimate the monetary policy reaction function (MPRF) in a DSGE framework for emerging economies.
  • To investigate the combined effects of credit spreads, fiscal imbalances, and monetary autonomy on interest rates in BRICS nations.
  • To analyze the impact of various economic shocks on output, inflation, and interest rates across different sample economies.

Main Methods:

  • Utilized a Dynamic Stochastic General Equilibrium (DSGE) framework.
  • Employed Bayesian analysis for parameter estimation.
  • Analyzed real-world data for BRICS member countries spanning from 1970 to 2021.

Main Results:

  • Posterior estimates confirm significant contributions of credit spread and fiscal imbalance to fluctuations in output, inflation, and interest rates across all sample economies.
  • Supply shocks were identified as the primary driver of inflation rate fluctuations.
  • Fiscal imbalance shocks notably affected output in Brazil, India, and South Africa, and impacted inflation and interest rates in China and South Africa.

Conclusions:

  • Credit spreads and fiscal imbalances are key determinants of macroeconomic fluctuations in emerging economies.
  • The impact of economic shocks, particularly fiscal imbalances, on output and interest rates exhibits significant cross-country heterogeneity within the BRICS.
  • Monetary policy frameworks must account for these country-specific dynamics and external shocks for effective management.