Nonlinear Monetary Policy Transmission and Financial Stability in Emerging Market Economies: Evidence from a Dynamic Panel GMM Framework
Year: 2026
Type: article
Abstract: This study investigates the asymmetric effects of monetary policy on financial stability in emerging market economies (EMEs).While conventional macroeconomic frameworks-such as linear Taylor-type policy rules-assume symmetric transmission of interest rate changes, growing empirical evidence suggests that monetary tightening and easing may generate uneven financial responses across different phases of the financial cycle.Using a panel dataset of 15 emerging economies covering the period 2000-2023, this paper evaluates whether interest rate increases during downturns exert stronger adverse effects on banking sector stability than equivalent rate reductions during expansionary phases.Financial stability is proxied by the ratio of non-performing loans (NPLs) to total gross loans.To account for endogeneity, persistence, and unobserved heterogeneity in macro-financial data, we employ a dynamic panel System Generalized Method of Moments (GMM) estimator implemented in EViews 13.The empirical findings indicate that a one-percentage-point increase in the policy interest rate leads to a statistically significant and persistent rise in NPL ratios, with effects lasting up to two years.Impulse response analysis confirms the presence of asymmetric transmission, particularly during financially fragile periods.Diagnostic tests-including Hansen's J-statistic and parameter stability assessments-support the validity of the instrument set and confirm structural stability of the estimated relationships after 2008.The results challenge the short-run neutrality of monetary policy with respect to financial stability.For emerging market central banks facing trade-offs between inflation control and financial resilience, incorporating financial stability indicators directly into monetary policy frameworks may help mitigate procyclical financial amplification effects.Overall, the study contributes to the ongoing debate regarding the price stability-financial stability nexus and the role of macroprudential coordination in emerging economies.
DOI: 10.56334/sei/9.2.105
Author: Mecheri Mohamed
Institution: Université Mustapha Stambouli de Mascara
Language: English
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W7142004133