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Measuring monetary policy by money supply and interest rate: evidence from emerging economies

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  • Bui Trung Thanh
  • Gábor Kiss Dávid

    (Faculty of Economics and Business Administration, University of Szeged. Postal address:6722, 1 Kálvária sgt, Szeged, Hungary.)

Abstract

Although measuring monetary policy is a contentious issue in the literature, much less evidence on this issue is available for emerging economies. This paper aims to investigate the role of interest rate and money supply in measuring monetary policy in twelve emerging economies that target inflation through the analysis of Granger causality, impulse response function, and forecast error variance decomposition. The empirical results show that both money supply and interest rate are useful predictors for changes in inflation. Moreover, both show a comparable power to explain the variation of inflation. However, a rise in interest rate increases rather than decreases inflation, whereas money supply has a positive and expected effect on inflation. These findings suggest that interest rate may not fully capture the overall stance of monetary policy or interest rate has a limited effect on inflation.

Suggested Citation

  • Bui Trung Thanh & Gábor Kiss Dávid, 2021. "Measuring monetary policy by money supply and interest rate: evidence from emerging economies," Review of Economic Perspectives, Sciendo, vol. 21(3), pages 347-367, September.
    • Handle: RePEc:vrs:reoecp:v:21:y:2021:i:3:p:347-367:n:4
    DOI: 10.2478/revecp-2021-0015
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    References listed on IDEAS

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    Cited by:

    1. Bui Thanh Trung, 2022. "Measuring Monetary Policy in Emerging Economy: The Role of Monetary Condition Index," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(6), pages 499-522, June.

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    More about this item

    Keywords

    monetary policy instruments; interest rate; money supply; emerging economies;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance

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