Monetary policies of industrial countries, emerging market credit cycles and feedback effects

Merging recent empirical findings into an overinvestment framework this paper describes a recursive process of monetary policy interactions between industrialised and emerging market economies that provides an explanation of what may have led to the current global low interest rate environment. Based on the overinvestment framework we show that in the prevailing asymmetric world monetary system, monetary policies of industrialised countries can fuel credit booms in emerging markets. We argue that the absorption of inflationary pressure by emerging markets during boom periods and the fear of feedback effects of crises in emerging markets encourage delayed monetary tightening in industrialised countries.