Monetary Policy Transmission in Emerging Economies: Asymmetric Effects of Interest Rate Shocks on Sectoral Output and Inflation Dynamics

Abstract

This article investigates the asymmetric effects of monetary policy interest rate shocks on sectoral output and inflation dynamics across four major emerging economies – Brazil, India, Indonesia, and South Africa – over the period 2000–2023. Using a Panel Structural Vector Autoregression (PSVAR) model with time-varying coefficients, we find that contractionary monetary policy shocks produce significantly heterogeneous effects across industrial sectors. The manufacturing and construction sectors exhibit the strongest negative output responses, while agriculture and services demonstrate relative resilience. More importantly, we uncover pronounced asymmetries in both output and inflation responses depending on the state of the business cycle, the level of financial development, and the degree of exchange rate pass-through. Inflation dynamics respond asymmetrically to positive versus negative interest rate shocks, with upward price rigidities prevailing in low-inflation environments. Our findings challenge the one-size-fits-all approach to monetary policy implementation in emerging economies and offer actionable insights for central banks, financial managers, and commerce policymakers. The results underscore the necessity of sector-aware monetary policy frameworks and highlight the role of financial deepening in moderating transmission asymmetries.