IMF Study: Monetary Policy Ineffective Against External Shocks in Low-Income Nations
SDG 1: No Poverty | SDG 10: Reduced Inequalities
Institutions: Ministry of Finance | Reserve Bank of India (RBI) | NITI Aayog
A new IMF Working Paper (October 2025) looks at how certain nations (Low-Income Countries, or LICs) cope when the cost of important imports, like food or oil, suddenly rises on the global market. This unexpected event is referred to as an External Shock. The research was conducted using a detailed economic simulation (Open Economy HANK model) tailored for these economies.
The study confirms that in these nations, where many people live βhand-to-mouthβ (meaning they have little to no savings, or are hand-to-mouth households), an external price shock causes a major crisis:
The Economy Slows Down: Businesses and general activity suffer.
Prices at Home Shoot Up (Inflation): Everyday goods become more expensive.
Wages Lose Value: Peopleβs salaries canβt buy as much as they used to.
The most important discovery is that this crisis hits the poorest citizens the hardest, significantly widening the gap between the rich and the poor, which is documented as a sharp rise in Consumption Inequality.
The paper concludes that the usual way a country fights inflation-the central bank raising interest rates to make borrowing expensive-does very little to help the poor families. This illustrates the difficult choices and necessary compromises faced by policymakers (Monetary Policy Trade-offs). To protect the most vulnerable people, governments should focus on direct aid (Fiscal Transfers), such as providing cash transfers or subsidies, instead of relying on interest rate changes alone.
Follow the full report here:
IMF: External Shocks and Monetary Policy Trade-offs in Low-Income Countries