Expansionary monetary policy drives down long-term interest rates in OECD countries and pushes them higher in emerging countries

There is a key difference between the effects of monetary policy in OECD and emerging countries: In OECD countries, monetary expansion (growth in the central bank’s balance sheet) has little effect on capital flows and exchange rates; it leads to lower long-term interest rates, which are not disrupted by any exchange rate depreciation or imported inflation; In emerging countries (excluding China), monetary expansion leads to significant capital outflows, sharp exchange rate depreciation and higher long-term interest rates via two mechanisms: a rise in the currency risk premium and a rise in expected inflation due to imported inflation. So emerging countries cannot at all use the same monetary remedies (such as quantitative easing) as in OECD countries .