Assessing monetary policy efficiency in developed and emerging economies

This paper examines how institutional and macroeconomic conditions are associated with monetary policy efficiency in advanced and emerging economies. Efficiency scores are estimated using a Data Envelopment Analysis (DEA) framework with variable returns to scale, considering the policy interest rate as input and the inverses of inflation and unemployment as outputs. Dynamic relationships are analyzed using a panel vector autoregression model for a sample of 33 countries over the 2000–2019 period, prior to the COVID-19 pandemic. The results indicate substantial cross-country heterogeneity. In emerging economies, improvements in institutional quality, financial stability, and fiscal consolidation are generally followed by higher monetary policy efficiency, whereas exchange rate appreciations are associated with trade-offs between inflation and unemployment stabilization. Advanced economies, however, exhibit comparatively muted responses, consistent with stronger institutional environment and credible policy instances. These findings highlight how structural elements can shape monetary policy efficiency across countries.