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Monetary Transmission: Are Emerging Market and Low-Income Countries Different?

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  • Ales Bulir
  • Jan Vlcek

Abstract

We use two representations of the yield curve, by Litterman and Scheinkman (1991) and by Diebold and Li (2006), to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in a sample of emerging market and low-income countries. We find a robust link from short-term policy and interbank rates to longer-term bond yields. Two policy implications emerge. First, the presence of well-developed secondary financial markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of monetary regime: advanced countries with a credible IT regime seem to have "better behaved" yield curves than those with other monetary regimes.

Suggested Citation

  • Ales Bulir & Jan Vlcek, 2016. "Monetary Transmission: Are Emerging Market and Low-Income Countries Different?," Working Papers 2016/02, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2016/02
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    More about this item

    Keywords

    Monetary transmission; yield curve;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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