Bitesize: Riding the waves: the breadth of global monetary policy changes

Shaheen Bhikhu and Thomas Viegas

Central banks respond to inflation by setting interest rates in order to achieve domestic price stability.  Occasionally, economic shocks are global in nature and so monetary policy can move in tandem across the world. But how common have directional changes in monetary policy been across the world over recent decades?

To answer this, we developed a monetary policy diffusion index (MPDI) to illustrate the breadth of monetary policy changes. The diffusion index is calculated as = 1* per cent of central banks increasing interest rates + 0.5* per cent leaving rates unchanged + 0* per cent reducing rates.

A reading above/below 50 indicates that more central banks have increased/reduced interest rates relative to the previous quarter, than the reverse. The MPDI does not include changes in other monetary policy tools, such as asset purchases.

Chart 1: Global monetary policy diffusion index (MPDI)

The global MPDI highlights two periods of broad policy easing over recent decades (Chart 1). In 2009, an average of 25 out of 39 major central banks cut rates each quarter in response to the Global Financial Crisis. In 2020, a broadly similar proportion cut rates to support growth and inflation in response to Covid-19.

More recently, the MPDI underscores the breadth in policy tightening against elevated inflationary pressures. In 2022 Q2, just under 30 major central banks raised rates, the highest proportion since the Index began.

Chart 2 splits the MPDIs for advanced and emerging market economies. It shows that the correlation between them is lower outside of the periods of global macroeconomic shocks.

Chart 2: MPDI for advanced economies and emerging market economies

Shaheen Bhikhu works in the Bank’s International Surveillance Division and Thomas Viegas works in the Bank’s Market Intelligence and Analysis Division.

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One thought on “Bitesize: Riding the waves: the breadth of global monetary policy changes

  1. It would have been better to include an eqation and list the chsoen variables.
    More explanation of why 0/0.5 and 1 would also have been helpful. It seems a bit too neat.
    Links could also be made to the actual rise as well as the absolute rate, making the model more compliacted but perhaps more realistic.
    What do you do about negative interest rates?.

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