Monetary Policy is Not Always Systematic and Data-Driven: Evidence from the Yield Curve

Does monetary policy react systematically to macroeconomic innovations in emerging and low-income countries? And do such systematic responses vary across monetary policy regimes? In a sample of 16 countries – operating under various monetary regimes – we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations in almost all countries. The speed and strength of reactions are not identical across all countries, however, but reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in inflation-targeting countries, the links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.