Financial Intermediation and Monetary Policy Transmission in EMEs: What has Changed Since the 2008 Crisis?

In contrast to the benign neglect of the financial system in traditional monetary models, there has been growing evidence in recent years that the size and the structure of financial intermediation play a critical role in the transmission of monetary policy. This paper reviews the implications of three key post-2008 crisis developments in financial intermediation—the role of banks, the globalization of debt markets and the sustained decline in global long-term interest rates—for various transmission channels of monetary policy in EMEs. The paper argues that the globalization of debt markets means that monetary policy can no longer be conducted through the short-term interest rate alone. This raises questions about the appropriate instruments to be used for economic stabilization in this new environment.